2) Open Economy problem: Consider an economy described by the information below. Calculate Consumption (C), National Saving (S), Net Foreign Investment (NFI), Net Exports (NX), and the equilibrium exchange rate (ɛ). The world interest rate is given by r* and is assumed to remain constant. Y = C +I+G + NX Y = 10,000 G= 2,000 T= 2,000 C = 1,200 + 0.75(Y – T) I= 1,200 – 50r r* = 6 NX = 700 – 800ɛ %3D NFI = NX = = 3 Suppose government increases spending from $2,000 to $2,400, with no change in net taxes. Calculate the new values for Consumption, National Savings, Net Foreign Investment, Net Exports, and the real exchange rate. NFI = NX = = 3 Did the fiscal policy have a positive effect on output and employment? (yes/no) Did the domestic currency appreciate or depreciate in real terms?
2) Open Economy problem: Consider an economy described by the information below. Calculate Consumption (C), National Saving (S), Net Foreign Investment (NFI), Net Exports (NX), and the equilibrium exchange rate (ɛ). The world interest rate is given by r* and is assumed to remain constant. Y = C +I+G + NX Y = 10,000 G= 2,000 T= 2,000 C = 1,200 + 0.75(Y – T) I= 1,200 – 50r r* = 6 NX = 700 – 800ɛ %3D NFI = NX = = 3 Suppose government increases spending from $2,000 to $2,400, with no change in net taxes. Calculate the new values for Consumption, National Savings, Net Foreign Investment, Net Exports, and the real exchange rate. NFI = NX = = 3 Did the fiscal policy have a positive effect on output and employment? (yes/no) Did the domestic currency appreciate or depreciate in real terms?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:2) Open Economy problem: Consider an economy described by the information below.
Calculate Consumption (C), National Saving (S), Net Foreign Investment (NFI), Net
Exports (NX), and the equilibrium exchange rate (ɛ). The world interest rate is given by
r* and is assumed to remain constant.
Y = C +I+G + NX
Y = 10,000
G= 2,000
T= 2,000
C = 1,200 + 0.75(Y – T)
I= 1,200 – 50r
r* = 6
NX = 700 – 800ɛ
%3D
NFI =
NX =
= 3
Suppose government increases spending from $2,000 to $2,400, with no change in net taxes.
Calculate the new values for Consumption, National Savings, Net Foreign Investment, Net
Exports, and the real exchange rate.
NFI =
NX =
= 3
Did the fiscal policy have a positive effect on output and employment? (yes/no)
Did the domestic currency appreciate or depreciate in real terms?
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