Consider the following model of a small, open economy: Y = 4000 Y d = C + I + G + NX Y = Y d C = 400

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Consider the following model of a small, open economy:

  • Y = 4000
  • Yd = C + I + G + NX
  • Y = Yd
  • C = 400 + 08(Y – T)
  • I = 800 – 5000r
  • NX = 800 – 400E (E = Exchange Rate)
  • G = 300
  • T = 1000

A Assuming that the world’s real interest rate is 8% (rw* = 008), what will national saving (S) and investment (I) be for this economy?

B What are the equilibrium values of net exports (NX) and the real exchange rate (E)?

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