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Assignment No.



Submitted By

Abhishek Gautam WMG XIX 192001
Group 1 Consider an economy described by the following equations: Y = C + I + G + NX, Y = 5000, G = 1000, T = 1000, C = 250 + 0.75(Y-T), I = 1000 – 50r NX = 500 - 500ε, r = r* = 5. a. In this economy, solve for national saving, investment, the trade balance, and the equilibrium exchange rate Solution:  National Saving S=Y-C-G S=5000-[250+0.75(5000-1000)]-1000

Solve for national saving. Solution:  National Saving S=Y-C-G S=5000-[250+0. the trade balance. investment. c. so many of this investment must be financed by borrowing from abroad.) Solve for national saving. (G again 1000. and appreciation of currency. investment.75(5000-1000)]-1250 S=500  I=1000-50r= 750  Trade Balance NX=500-750=250  Equilibrium exchange rate NX=500-500ε G ε=1. domestic investment exceeds domestic saving. Now suppose that the world interest rate rises from 5 to 10 per cent.5 S real interest rate Investment Earli er 1000 750 5 750 Later 1250 500 5 750 Increase d Decreas ed same same Now. Suppose now that G rises to 1250. and the equilibrium exchange rate. Solution:  National Saving S=Y-C-G S=5000-[250+0. Explain what you find.75(5000-1000)]-1000 S=750  I=1000-50r= 500  Trade Balance NX=750-500=250 . Explain what you find. and the equilibrium exchange rate.S=750  I= 1000-50r I=1000-50(5)=750  Trade Balance. This capital inflow is accomplished by reducing net exports. NX= S-I NX=750-750=0  Equilibrium exchange rate NX=500-500ε => ε=1 b. the trade balance.

.5 Saving is unchanged as 750. but the higher world interest rate reduces investment. Now capital outflow is accomplished by running a trade surplus. which requires the currency depreciate. Equilibrium exchange rate NX=500-500ε ε=0.