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420worksheet5ans

# 420worksheet5ans - Y = C I G NX Y = 2,000 G = 400 T = 200 C...

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ECON 420 – 002 & 004 Worksheet 5 1. In a closed economy, the following functions hold: C = 200 + 0.8(Y-T) I = 200 -10r G = 500 Y = 2000 T = 500 a. What is the equilibrium interest rate? b. What is the equilibrium level of Consumption and Investment? a. You can use Y=C+I+G or S=I to solve for r. Method 1: S = Y-C-G = 2000- (200+0.8(2000-500)-500) = 100 S = I in equilibrium 100 = 200-10r r = 10 Method 2: Using Y = C+I+G 2000=200+0.8(2000-500)+200-10r+500 =2100-10r r = 10 C = 200 +0.8*(2000-500)=1400 I = 200-10r = 200-10*10=100 2. Consider an open economy described by the following equations:

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Unformatted text preview: Y = C + I + G + NX Y = 2,000 G = 400 T = 200 C = 500 + 0.75 (Y-T) I = 200-10r NX = 100-100ε r = r * = 4 a. In this economy, solve for national saving, investment, the trade balance, and the equilibrium exchange rate. National Saving: S= Y-C-G = 2000-(500+0.75*(2000-200)-400) S=-250 Investment: I = 200-10*4=160 Equilibrium exchange rate: S-I = NX-250-160=100-100ε-510=-100ε Exchange rate = 5.10 Trade balance = 100-100*5.10=-410...
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