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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