Problem 1: What is the relationship between RER (real exchange rate) and net exports (NX i.e. the current account balance)? Plot it as a line in the RER-NX space (vertical, horizontal, upward sloping or downward sloping) and then plot the S-I (private saving minus investment) quantity on the same graph. Discuss the significance of the intersection, how will it be affected by private consumption and government spending decisions?
Problem 2: Show and discuss the “Gap” model in the context of the RER-NX graph in 1.1, use other graphs if necessary.