Question: Consider the following model of a small, open economy:

• 𝑌=4000
• 𝑌 ^𝑑 =𝐶+𝐼+𝐺+𝑁𝑋
• 𝑌=𝑌 ^𝑑
• 𝐶=400+0.8(𝑌−𝑇)
• 𝐼=800−5000𝑟
• 𝑁𝑋=800−400𝜀
• 𝐺=300
• 𝑇=1000

a. Assuming that the world’s real interest rate is 8% (rw* = .08), 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 ( \(\varepsilon \) )?

c. What are the equilibrium values of net exports and the real exchange rate if the world’s real interest falls to 6%, all else equal?

d. What are the equilibrium values of net exports and the real exchange rate if the world’s real interest rate is 8%, but domestic government purchases (G) are reduced to 100, all else equal?

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