Calculation of national income from the given data

Reference no: EM1313893

1. You are given the following information for the equations for investment demand, private saving, and the government's deficit: Id =2400-125r, S= 1,750 + 75r, T-G = -350. Suppose that this is a closed economy. The equilibrium interest rate is the one at which national savings and investment demands are equal.

a. Derive the equation for national saving.

b. Compute the equilibrium interest rate. Compute the amount of investment demand, private saving, and national saving at the equilibrium interest rate.

c. Suppose that the government budget deficit is cut by $200 billion. Compute the new equilibrium interest rate. Compute the values of investment demand, private saving, and national saving at the new equilibrium interest rate.

d. Compare and contrast your answers to parts b and c.

2. Given the information at the beginning of question 1, assume we have a small open economy and that the foreign interest rate is 4.8 percent.

a. Compute the amounts of investment demand, private saving, national saving, net exports, and net foreign borrowing at the foreign interest rate.

b. Suppose that the government budget deficit is cut by $200 billion. Compute the new values of investment demand, private saving, national saving, and vet exports. Is the economy now borrowing from the rest of the world or lending to the rest of the world?

c. Suppose that instead of a small open economy, we have a large open economy, and that initially the domestic and foreign interest rates are both 4.8 percent. The government budget deficit is cut by $200 billion. As a result, the domestic and foreign interest rates both decline to 4.4 percent. Compute the new amounts of investment demand, private saving, national saving, net exports, and foreign borrowing (lending) at the new domestic and foreign interest rates.

d. Explain why your answers to parts b and c differ.

3. Suppose a country has net exports of 40, transfer payments of 20, net investment income of -15, and a balance of payments surplus of

4. Find this country's current account balance and capital account balance.

Reference no: EM1313893

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