Consider a world with only two countries, which are designated the home country (H) and the foreign

country (F). Output equals its full-employment level in each country. You are given the following information about each country:

Home Country

Consumption: CH = 100 + 0.5YH - 500rw

Investment: IH = 300 - 500rw

Government Purchases: GH = 155

Full-employment Output: YH = 1000

Foreign Country

Consumption: CF = 225 + 0.7YF - 600rw

Investment: IF = 250 - 200rw

Government Purchases: GF = 190

Full-employment Output: YF = 1200

a. Write national saving in the home country and in the foreign country as functions of the world real

interest rate rw.

b. What is the equilibrium value of the world real interest rate?

c. What are the equilibrium values of consumption, national saving, investment, the current account

balance, and absorption in each country?