Sunshine is a small open economy described by the following long-run classical equations where Y is the economy’s real GDP, T-taxes, G-government spending, NX – net exports, I-investment, C- consumption, r – domestic interest rates, r* - world interest rates.
Y=4000
G=1250
T=1,000
C=250+2/3 (Y-T)
I = 450-25r
NX= 1250 –175ϵ
r = r* = 4
a) Required: Select the appropriate answer that represent [i] investment, [ii] national savings, [iii] equilibrium exchange rate and [iv] trade balance.
b) Suppose the government of sunshine cut its spending to 2,000. Required: Select the appropriate answer that represent [i] investment, [ii] national savings, [iii] equilibrium exchange rate and [iv] trade balance.
c) Now suppose the world interest rate falls from 8 to 3 percent, (G is again 2000). Required: Select the appropriate answer that represent [i] private savings, [ii] public savings, [ii] national savings, [iv] investment, [v] trade balance and [vi] equilibrium exchange rate