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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 Spring '08
 Drozd
 Economics, Macroeconomics, Inflation, gross domestic product, loanable funds, Macronia

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