Consider an economy described by the following equations:
Y = C + I + G + NX,
Y = 5,000,
G = 1,000,
T = 1,000,
C = 250 + 0.75(Y – T),
I = 1,000 – 50r,
NX = 500 – 500e,
r = r* = 5.
a. In this economy, solve for national saving, investment, the trade balance, and the Equilibrium exchange rate.
b. Suppose now that G rises to 1,250. Solve for national saving, investment, the trade balance, and the equilibrium exchange rate. Explain what you find.