1) Let 2 large open economies, home economy and foreign economy. In home country following relationships hold:
Desired consumption, C^d = 320 + 0.4(Y - T) - 200r^w
Desired investment, I^d = 150 - 200r^w
Output, Y = 1000
Taxes, T = 200
Government Purchases, G = 275
In foreign country the given relationships hold:
Desired consumption, C^dFor = 480 + 0.4(YFor - Tfor) - 3000r^w
Desired investment, I^dFor = 225 - 300r^w
Output, YFor = 1500
Taxes, TFor = 300
Government purchases, GFor = 300
a) Find the equilibrium interest rate in international capital market? prepare down the equilibrium values of national saving, consumption, investment, and current account balance in each country?
b) Assume that in home country government buys increase by 50 to 325. Taxes also rise by 50 to remain deficit from growing. Determine the new equilibrium interest rate in international capital market? Compute the new equilibrium values of consumption, investment, national saving and the current account balance in each country?