{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

Answer s h y h c h g h 1000 1 00 05 1000 500r 155 245

Info icon This preview shows pages 3–6. Sign up to view the full content.

View Full Document Right Arrow Icon
functions of the world real interest rate r. Answer: S H = Y H - C H G H = 1000 − [1 00 + (0.5 × 1000) − 500r] – 155 = 245 + 500r S F = Y F − C F G F = 1200 − [225 + (0.7 × 1200) − 600r] − 190 = −55 + 600r b). what is the equilibrium value of the world real interest rate? Answer: NX H = S H - I H = 245 + 500r − (300 − 500r) = −55 + 1000r NX F = S F - I F = - 55 + 600r − (250 − 200r) = -305 + 800r In equilibrium, one country’s CA surplus should equal to the other country’s CA deficit, thus we have: NX H + NX F = 0, so −55 + 1000r + (−305 + 800r) = 0 1800r = 360 r = 0.20
Image of page 3

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Week 8 Tutorial Questions Solutions (Ch5) Week 8 Page 4 c). what are the equilibrium values of consumption, national saving, investment, the current account balance, and absorption in each country? Answer: C H = 100 + (0.5 × 1000) − (500 × 0.20) = 500 S H = 245 + (500 × 0.20) = 345 I H = 300 − (500 × 0.20) = 200 CA H = NX H = -55 + (1000 × 0.20) = 145 (assume NFP = 0) Absorption H = C H + I H + G H = 500 + 200 + 155 = 855 C F = 225 + (0.7 × 1200) − (600 × 0.20) = 945 S F = -55 + (600 × 0.20) = 65 I F = 250 − (200 × 0.20) = 210 CA F = NX F = −305 + (800 × 0.20) = −145 (assume NFP = 0) Absorption F = C F + I F + G F = 945 + 210 + 190 = 1345 Q4: How would each of the following affect national saving, investment, the current account balance, and the real interest rate in a large open economy? a). An increase in the domestic willingness to save (which raises desired national saving at any given real interest rate). Answer: The home country's saving curve shifts to the right, from S 1 to S 2 . The real world interest rate falls, so that the current account surplus in the home country equals the current account deficit in the foreign country. S rises, I rises, CA rises, r w falls.
Image of page 4
Week 8 Tutorial Questions Solutions (Ch5) Week 8 Page 5 b). An increase in the willingness of foreigners to save.
Image of page 5

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 6
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}