ECONOMICS
Chapter 5

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

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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

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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.
Week 8 Tutorial Questions Solutions (Ch5) Week 8 Page 5 b). An increase in the willingness of foreigners to save.

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