10H7 - Econ. 102. Homework 7. Due: April 19, 2010. *. 1....

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Econ. 102. Homework 7. Due: April 19, 2010. *******. 1. Show your derivation and calculation explicitly. 2. Use the ruler to draw graphs. (Also show the scale explicitly). 3. E-mail submission of your answer will not be accepted. 4. Do not copy someone else’s answer. ******. 1. [ Mankiw p. 147] Consider a small country economy described by the following equations. (1) Y = 5,000 (2) Y = C + I + G + NX (3) C = a + b(Y-T) . (4) I = c – dr. (5) G = 1000. (6) T = 1000 (7) r = r* = 5 . (8) NX = 500 - 500 ε where a = 250, b = 0.75, c = 1,000, d = 50. Equilibrium Analysis: (a) Derive S-I from (1) – (7) and use S – I = NX, i.e., net capital flow always equals the trade balance, to find the equilibrium ε and NX. Also show your answer graphically in the ( ε , NX) space. [5] Comparative static: (b) Suppose G = 1,000 rises to G’ = 1,250. Find the new equilibrium ε and NX. Also show your answer graphically in the ( ε , NX) space. [5] (c) Suppose r* = 5 rises to r*’ = 10. Find the new equilibrium
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