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Consider a small open economy. Assume that GDP (Y) is 5000. Consumption (C) is given by the equation C = 1000 + 0.25(Y-T). Investment (I) is given by the equation I = 1500 – 50r, where r is the real interest rate in percentage points. The world interest rate is actually 5% (r*=5). Taxes (T) are 1000 and government spending (G) is 1500. Net exports are given by the equation NX=500-250Ɛ. Suppose T and G at their initial values (1000 and 1500). Suppose there is a shift in the global supply of funds, so that the new world interest rate becomes 3%. Compute the equilibrium real exchange rate. Represent the equilibrium graphically and interpret your result.

Consider a small open economy. Assume that GDP (Y) is 5000. Consumption (C) is given by the equation C = 1000 + 0.25(Y-T). Investment (I) is given by the equation I = 1500 – 50r, where r is the real interest rate in percentage points. The world interest rate is actually 5% (r*=5). Taxes (T) are 1000 and government spending (G) is 1500. Net exports are given by the equation NX=500-250Ɛ. Suppose T and G at their initial values (1000 and 1500). Suppose there is a shift in the global supply of funds, so that the new world interest rate becomes 3%. Compute the equilibrium real exchange rate. Represent the equilibrium graphically and interpret your result.

ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
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Consider a small open economy.

Assume that GDP (Y) is 5000. Consumption (C) is given by the equation C = 1000 + 0.25(Y-T). Investment (I) is given by the equation I = 1500 – 50r, where r is the real interest rate in percentage points. The world interest rate is actually 5% (r*=5). Taxes (T) are 1000 and government spending (G) is 1500. Net exports are given by the equation NX=500-250Ɛ.

  1. Suppose T and G at their initial values (1000 and 1500). Suppose there is a shift in the global supply of funds, so that the new world interest rate becomes 3%. Compute the equilibrium real exchange rate. Represent the equilibrium graphically and interpret your result.

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