Consider an economy described by the following equations:
Y = C + I + G + NX,
Y = 5,000,
G = 1,000,
T = 1,000,
C = 250 + 0.75(Y − T),
I = 1,000 − 50 r,
NX = 500 − 500 e,
r = r * = 5.
a. In this economy, solve for national saving, investment, the trade balance, and the equilibrium exchange rate.
b. Suppose now that G rises to 1,250. Solve for national saving, investment, the trade balance, and the equilibrium exchange rate. Explain what you find.
c. Now suppose that the world interest rate rises from 5 to 10 percent. (G is again 1,000.) Solve for national saving, investment, the trade balance, and the equilibrium exchange rate. Explain what you find.