Problem: We assume that the world consists of two large open economies, home and foreign.
Home country initial conditions
Cd = 500 + 0.4(Y-T) - 300rw
Id = 200 - 300rw
Y = 1500
T = 300
G = 300
Foreign Country Initial Conditions
Cdf = 340 + .4(Yf-Tf) - 200rw
Idf = 100 - 200rw
Yf = 1000
Tf = 200
Gf = 275
a) What is the equilibrium interest rate that clears the international goods market? Show all work
b) Now calculate the levels of desired savings, investment, and net exports for each country at this equilibrium world interest rate.
c) Which country is acting like the US (i.e.., spending beyond its means) and which country is acting like China (i.e. the saver) You must use and define absorption to get full credit.