1) Let a world with only 2 countries, that are designated home country (H) and foreign country (F). Output equal sits full-employment level in each country. You are provided the information which is given below about each country:
Home Country
Consumption: CH = 100 + 0.5YH - 500r
Investment: IH = 300 -500r
Government Purchases: GH = 155
Full-employment Output: YH = 1000
Foreign Country
Consumption: CF = 225 + 0.7YF - 600r
Investment: IF = 250 - 200r
Government Purchases: GF = 190
Full-employment Output: YF = 1200
a) Write national saving in home country and in foreign country as functions of world real interest rate r.
b) Describe the equilibrium value of world real interest rate?
c) Compute equilibrium values of investment, consumption, national saving, the current account balance, and absorption in each country?