Assume That the Following Equations Characterize a Large Open Economy $\varepsilon$

question 125

Essay

Assume that the following equations characterize a large open economy:
(1) Y = 5,000
(2) Y = C + I + G + NX
(3) C = 1/2(Y - T)
(4) I = 2,000 - 100r
(5) NX = 500 - 500 $\varepsilon$
(6) CF = -100r
(7) CF = NX
(8) G = 1,500
(9) T = 1,000.
Where NX is net exports, CF is net capital outflow, and $\in$ is the real exchange rate.
Solve these equations for the equilibrium values of C, I, NX, CF, r, and $\varepsilon$ . (Hint: Substitute equations (9) and (1) into (3), then substitute (1), (3), (4), (8), and (5) into (2). Then substitute (5) and (6) into (7). Now you have two equations in r and $\varepsilon$ . Check your work by seeing that all of these equations balance given your answers.)

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Definitions:

Discount Rate

The interest rate used in discounted cash flow (DCF) analysis to determine the present value of future cash flows.

Useful Life

The estimated lifespan of a fixed asset, during which it can be expected to contribute to company operations.

Present Value

The current value of a future sum of money or stream of cash flows given a specified rate of return, used in discounting to account for the time value of money.

Annual Cash Inflows

The total amount of money, primarily from operating activities, investments, and financing, that enters a company within a year.