Your search of publicly-available data for last year for the island of Nevis reveals the following: nominal GDP = $85m; consumption = $35m; imports = $20m; exports = $16m; government expenditure = $40m; and the government’s budget is balanced.
a) Calculate the level of investment. [4 points]
b) Suppose now that the government decides to spend $5m on a new assembly building.
What will be the new level of (private) investment if nothing else changes? [2 points]
c) If you allow interest rates to adjust, draw a diagram to show what this development would
look like in the market for funds and explain what your diagram is showing.