Chapter 1. Chapter 5 – Problem 2

Step 1

Work It Out

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You must read each slide, and complete any questions on the slide, in sequence.

Question

Consider an economy described by the following equations: Y = C + I + G + NX, Y = 5,000, G = 1,000, T = 1,000, C = 250 + 0.75(Y – T), I = 1,000 – 50r, NX = 500 – 500ε, r = r* = 5.

In this economy, solve for private saving, public saving, national saving, investment, the trade balance, and the equilibrium exchange rate.

Private Saving = Cna/muxNCTk=

Public Saving = 1Wh3cvJ2xF4=

National Saving = Cna/muxNCTk=

Investment = Cna/muxNCTk=

Net Exports (Trade Balance) = 1Wh3cvJ2xF4=

Exchange Rate = 0VV1JcqyBrI=

Review Chapter 5 for a discussion of the determinants of saving, investment, net exports, and the exchange rate in the small open economy.

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Step 2

Question

Consider an economy described by the following equations: Y = C + I + G + NX, Y = 5,000, G = 1,000, T = 1,000, C = 250 + 0.75(Y – T), I = 1,000 – 50r, NX = 500 – 500ε, r = r* = 5.

Suppose now that G rises to 1,250. Solve for private saving, public saving, national saving, investment, the trade balance, and the equilibrium exchange rate.

Private Saving = Cna/muxNCTk=

Public Saving = 0O3WEi+rRa4=

National Saving = poG0pQg2yAs=

Investment = Cna/muxNCTk=

Net Exports (Trade Balance) = 0O3WEi+rRa4=

Exchange Rate = W586m59nWqI=

Review Chapter 5 for a discussion of the determinants of saving, investment, net exports, and the exchange rate in the small open economy.

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Step 3

Question

Consider an economy described by the following equations: Y = C + I + G + NX, Y = 5,000, G = 1,000, T = 1,000, C = 250 + 0.75(Y – T), I = 1,000 – 50r, NX = 500 – 500ε, r = r* = 5.

Now suppose that the world interest rate rises from 5 to 10 percent. (G is again 1,000.) Solve for private saving, public saving, national saving, investment, the trade balance, and the equilibrium exchange rate.

Private Saving = Cna/muxNCTk=

Public Saving = 1Wh3cvJ2xF4=

National Saving = Cna/muxNCTk=

Investment = poG0pQg2yAs=

Net Exports (Trade Balance) = xT0dQ64T6ZI=

Exchange Rate = jtIlOdIDwu3aZRJz

Review Chapter 5 for a discussion of the determinants of saving, investment, net exports, and the exchange rate in the small open economy.

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