Answered: Consider a world with only two…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Consider a world with only two countries (i.e., two large open economies), the home country and the foreign country. In the home country the following relationships hold:

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b) Suppose that in the home country the desired investment increases by 100, that is, I^d = 400−100r^w. What is the world equilibrium interest rate? What are the equilibrium values of consumption, national saving, investment, and the current account balance in each country?

desired consumption, Cd
desired investment, Iª
300-100
output, Y
2000
taxes, T =
250
government purchases, G = 300
In the foreign country the following relationships hold:
desired consumption, Cor
desired investment, Ifor
= 400+0.5(YT) - 100
government purchases, GFor
=
=
= 200+ 0.5(YFor - TFor) - 150r
= 400-150
1000
output, YFor =
taxes, TFor = 250
= 200
W

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