EBK MACROECONOMICS
EBK MACROECONOMICS
10th Edition
ISBN: 9780134896571
Author: CROUSHORE
Publisher: VST
Question
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Chapter 5, Problem 4NP

a)

To determine

To evaluate the equilibrium interest rate in the international capital market and the equilibrium values of national saving, consumption, investment, and current account balance in each country.

a)

Expert Solution
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Explanation of Solution

  Cd = 320 + 0.4(1000  200)  200rw= 320 + 320  200 rw= 640  200 rw CA = NX = Sd  Id = Y  (Cd + Id + G)= 1000  (640  200 rw + 150  200rw + 275)= 65 + 400 rw

  Cd is desired consumption, rw is world real interest rate, CA is current account ,NX is national income ,y is output, Id  is desired investment, T is taxes sd desired saving rate, Government spending.

 Foreign:

  CdFor=480 + 0.4(1500  300)300pw      = 480 +480300rw       =960300rwCAFor=NXFor=SdFor  IdFor = YFor  (CdFor + IFord + GFor)     = 1500  (960  300rw + 225  300rw + 300)       = 15 + 600 rw 

At equilibrium, 

  CA + CAFor = 0, so:      65 + 400 rw + 15 + 600 rw = 0      50 + 1000 rw = 0      rw = 0.05C = 640  200 rw = 630      CFor = 960  300 rw = 945      S = Y  C  G = 1000  630  275 = 95      SFor = YFor  CFor  GFor = 1500  945  300 = 255      I = 150  200 rw = 140      IFor = 225  300 rw = 210      CA = S  I = 95  140 = 45      CAFor = SFor  IFor= 255  210 = 45

For stands for foreign country. Cd is desired consumption, rw is world real interest rate, CA is current accountNX is national income,y is output, Id  is desired investment, T is taxes, S is saving, Gfor is foreign government spending

b)

To determine

To evaluate the equilibrium interest rate in the international capital market and the equilibrium values of national saving, consumption, investment, and current account balance in each country assuming that in the home country government purchases by 50 to 325 and taxes also increase by 50 to keep the deficit from increasing.

b)

Expert Solution
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Explanation of Solution

For stands for foreign country. Cd is desired consumption, rw is world real interest rate, CA is current account, NX is national income, y is output , Id  is desired investment, T is taxes, S is saving. People’s income tends to increase when the government expenditure on socio economic sectors increase, increase in incomes leads to increase in demand for imports as a result the home has to face deficitin current account.

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