Assume that the following equations characterize a small open economy:
(1) Y = 7,000
(2) Y=C+I+G+NX
(3) C = 1000+.70(Y - T)
(4) I=900-90r
(5) NX=700-700∈
(6) G=1,000
(7) T = 1,000
(8) r=r*=5
where NX is net exports and ∈ is the real exchange rate.
(a) What are public saving, private saving, and national saving? Solve these equations for the
equilibrium values of C, I, NX, and ∈ . Explain what you find using a graph.
(b) Suppose the government of this country decreases taxes by 500. What are public saving,
private saving, and national saving? Solve these equations for the equilibrium values of C, I,
NX, and ∈ . Explain what you find using a graph.