(a) Consider a closed economy whose desired savings (Sd) and desired investment (I) are given by the following expressions: where r denotes the real interest rate. Find the equilibrium in the Goods market for this economy, and represent it in a graph. From now on, suppose there are two large Countries in the world, say Canada (Ca) and the United States (US). Sd 100+600r Id = 170-400r (b) To start with, assume that both Countries are closed economies. Their desired consumption (Cd) and desired investment (I) are given by: Coca = 10+ cca (Yca - Tca) - 100r 15 - 100r IC CUS IUS = 40+ cus (Yus - Tus) - 200r = 230 - 200r Moreover, output (Y), taxes (T), public expenditure (G), and the marginal propensity to consume (c) are as follows:

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(a) Consider a closed economy whose desired savings (Sd) and desired investment (Id) are given by the
following expressions:
CC₂
rd
where r denotes the real interest rate.
Find the equilibrium in the Goods market for this economy, and represent it in a graph.
From now on, suppose there are two large Countries in the world, say Canada (Ca) and the United States
(US).
Ca
(b) To start with, assume that both Countries are closed economies. Their desired consumption (Cd)
and desired investment (I) are given by:
Cus
Its
Sd
Id =
=
=
=
100+ 600r
170 - 400r
10+ cca (Yca Tca) - 100r
15 - 100r
40+ cus (Yus - Tus) - 200r
= 230 - 200r
Moreover, output (Y), taxes (T), public expenditure (G), and the marginal propensity to consume (c)
are as follows:
Transcribed Image Text:(a) Consider a closed economy whose desired savings (Sd) and desired investment (Id) are given by the following expressions: CC₂ rd where r denotes the real interest rate. Find the equilibrium in the Goods market for this economy, and represent it in a graph. From now on, suppose there are two large Countries in the world, say Canada (Ca) and the United States (US). Ca (b) To start with, assume that both Countries are closed economies. Their desired consumption (Cd) and desired investment (I) are given by: Cus Its Sd Id = = = = 100+ 600r 170 - 400r 10+ cca (Yca Tca) - 100r 15 - 100r 40+ cus (Yus - Tus) - 200r = 230 - 200r Moreover, output (Y), taxes (T), public expenditure (G), and the marginal propensity to consume (c) are as follows:
Yca
Tca =
GCa
=
=
CCa =
100; Yus = 1000
20; Tus = 200
25; Gus = 200
0.7;cus = 0.7
Find the equilibrium real interest rates, savings and investment for the two closed economies. What are
the equilibrium values for consumption?
(c) Now assume that Canada and the US can freely trade with each other, and have access to the
international market for borrowing and lending. Find the world real interest rate, and the current account
balances for each Country. Compare: i) the world real interest rate to the real interest rates in the previous
part, ii) consumption before and after the change.
Transcribed Image Text:Yca Tca = GCa = = CCa = 100; Yus = 1000 20; Tus = 200 25; Gus = 200 0.7;cus = 0.7 Find the equilibrium real interest rates, savings and investment for the two closed economies. What are the equilibrium values for consumption? (c) Now assume that Canada and the US can freely trade with each other, and have access to the international market for borrowing and lending. Find the world real interest rate, and the current account balances for each Country. Compare: i) the world real interest rate to the real interest rates in the previous part, ii) consumption before and after the change.
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