Consider an economy described by the following equations:

Y = C + I + G + NX,

Y = 5,000,

G = 1,000,

T = 1,000,

C = 250 + 0.75(Y – T),

I = 1,000 – 50r,

NX = 500 – 500e,

r = r* = 5.

a. In this economy, solve for national saving, investment, the trade balance, and the Equilibrium exchange rate.

b. Suppose now that G rises to 1,250. Solve for national saving, investment, the trade balance, and the equilibrium exchange rate. Explain what you find.