Suppose the president of country A opens this economy to trade with the rest of the world in 2010. Furthermore, suppose that the investment demand is the same as in 2009. Now, instead of being provided the equilibrium level of SP, we are provided with the SP curve: r =0.025+0.000025Q, where r is still the real interest rate. We are also told that the capital inflow equals $200 billion in 2010. For this part of the problem assumed that the government has a balanced budget in the year 2010. What is the private savings in equilibrium? What is the NS in 2010?
What will be an ideal response?
Ans: The Q*=600 , KI=200, and thus we have Sp*= 400 in equilibrium.
NS=Sp+ SG =400+ 0 = 400
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