This preview shows pages 1–2. Sign up to view the full content.
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
This preview has intentionally blurred sections. Sign up to view the full version.
View Full Document
This is the end of the preview. Sign up
to
access the rest of the document.
 Spring '08
 Drozd
 Economics, Macroeconomics

Click to edit the document details