Question 1

Y = 5,000

C= 250 + 0.75(Y - T)

I = 1,000 - 50r

T = 1,000

G = 1,000

NX =500-500.

r*=5

a. Find national saving, investment, net exports, and nominal exchange rate.

b. Government spending increases by 250. Find national saving, investment, net exports, and nominal exchange rate.

c. Return to the original level of government spending, but increase the world interest rate to 10. Find national saving, investment, net exports, and nominal exchange rate.

Question 2

Use the model of the small open economy to predict what would happen to the trade balance, the real exchange rate, and the nominal exchange rate in response to each of the following events:

a. A fall in consumer confidence about the future induces consumers to spend less and save more.

b. Tax reform increases the incentive for businesses to build new factories.

c. The introduction of a stylish line of Toyotas makes some consumers prefer foreign cars over domestic cars.

d. The central bank doubles the money supply.

e. New regulations restricting the use of credit cards increase the demand for money.