# answerstohomework4spring2006 - Economics 102 Spring 2006...

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Economics 102 Spring 2006 Answer Key for Homework #4 1. a. To calculate the value of the equilibrium real interest rate you need to utilize the information you have and the model’s equations. Start by considering the equation Y = C + S P + T – TR. For Macronia, you are given a value for Y, C, and (T – TR). That allows you to solve for private saving and get 1100. The table tells you that S P = 1000 + 2000i R : when private saving equals 1100, then the real interest rate must equal .05 or 5%. Performing a similar calculation for Micronia reveals that the equilibrium real interest rate in Micronia is also 5%. b. To calculate net exports again consult the model’s equations and the information you are given. Using the formula Y = C + I + G + (X – M) note that you know Y, C, and G but do not know I or (X – M). But, you do know the equilibrium real interest rate so, for example, in Macronia you can calculate I by noting that I = 400 – 4000i R and plugging in a value of .05 into this equation. Thus, I for Macronia equals 200. Now, you can solve for the level of net exports for Macronia and you will get (X – M) = 400. Performing the same calculations using Micronia’s data you will find that investment in Micronia equals 1000 while net exports equal -400. Note that net exports in Macronia (400) equals net

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answerstohomework4spring2006 - Economics 102 Spring 2006...

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