We assume that the world consists of two large open economies,USA and China.

USA Initial Conditions

C^d = 320 + 0.4(Y-T) - 200r^w

I^d = 150 - 200r^w

Y = 1000

T = 200

G =275

China Initial Conditions

C^d_F = 480 + .4(Y_F -T_F) - 300r^w

I^d_F = 225 - 300r^w

Y_F = 1500

T_F = 300

G_F = 300

A. What is the equilibrium interest rate that clears theinternational goods market?

r^w = _____

B. Now calculate the levels of desired savings, investment, andnet exports for each country at this equilibrium world realinterest rate

s^d US ______ S^d China ________

I^d US________ I^d China ________

NX US________ NX China _________

Now China experiences an adverse productivity shock. As aresult, China's output falls to 1400.

C. Resolve for the world real interest rate that clears theinternational goods markets along with the 'new' S^d andI^d for each country.

S^dH__________ S^dF ________

I^dH ___________ I^dF _________