Consider a world with only two countries (i.e., two large open economies), the home country and the foreign country. In the home country the following relationships hold: { refer to image } b) Suppose that in the home country the desired investment increases by 100, that is, I^d = 400−100r^w. What is the world equilibrium interest rate? What are the equilibrium values of consumption, national saving, investment, and the current account balance in each country?

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Consider a world with only two countries (i.e., two large open economies), the home country and the foreign country. In the home country the following relationships hold:

{ refer to image }

b) Suppose that in the home country the desired investment increases by 100, that is, I^d = 400−100r^w. What is the world equilibrium interest rate? What are the equilibrium values of consumption, national saving, investment, and the current account balance in each country?

 
desired consumption, Cd
desired investment, Iª
300-100
output, Y
2000
taxes, T =
250
government purchases, G = 300
In the foreign country the following relationships hold:
desired consumption, Cor
desired investment, Ifor
= 400+0.5(YT) - 100
government purchases, GFor
=
=
= 200+ 0.5(YFor - TFor) - 150r
= 400-150
1000
output, YFor =
taxes, TFor = 250
= 200
W
Transcribed Image Text:desired consumption, Cd desired investment, Iª 300-100 output, Y 2000 taxes, T = 250 government purchases, G = 300 In the foreign country the following relationships hold: desired consumption, Cor desired investment, Ifor = 400+0.5(YT) - 100 government purchases, GFor = = = 200+ 0.5(YFor - TFor) - 150r = 400-150 1000 output, YFor = taxes, TFor = 250 = 200 W
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