3140ps2_Fall2011 - Economics 3140 Fall 2011 Problem Set 2...

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Economics 3140 Fall 2011 Problem Set 2 Due in Section Wednesday September 28, 2011 1. Consider a small open economy described by the following equations: Y = C + I + G + NX, Y = 6,000, G = 1,500, T = 1,000, C = 500 + 0.6(Y – T), I = 1,000 - 100r NX = 1000 - 500 ε r = r * = 5. a. In this economy, solve for national saving, investment, the trade balance, and the equilibrium exchange rate. b. Suppose now that G rises to 2,000. Solve for national saving, investment, the trade balance, and the equilibrium exchange rate. Explain what you found. c. Now suppose that the world interest rate rises from 5 to 7.5 percent (G is again 1,500). Solve for national saving, investment, the trade balance, and the equilibrium exchange rate. Explain what you found. 2. Assume that Iran gains nuclear weapons as well as the missiles to deliver them. While the missiles initially do not have the range to reach the United States they could reach its allies and thus this news would affect the U.S. economy in many ways. Use the model of the large open economy to examine each of the following
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3140ps2_Fall2011 - Economics 3140 Fall 2011 Problem Set 2...

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