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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)?