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 - 50 r

NX = 500 - 500ε

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.

c. Now suppose that the world interest rate rises from 5% to 10%. (G is again 1,000.) Solve for national saving, investment, the trade balance, and the equilibrium exchange rate. Explain what you find.