A large open economy has desired national saving of Sd = 20 + 200rw, and desired national investment of Id = 30 - 200rw. The foreign economy has desired national saving of 
= 40 + 100rw, and desired national investment of 
= 75 - 400rw.(a)Calculate the equilibrium values of rw, CA, CAFor, S, I, SFor, and IFor.(b)Suppose Sd rises by 45, so that now Sd = 65 + 200rw. Calculate the equilibrium values of rw, CA, CAFor, S, I, SFor, and IFor.(c)Suppose, with Sd back to Sd = 20 + 200rw, as in part (a), that Id rises by 45, to Id = 75 - 200rw. Calculate the
equilibrium values of rw, CA, CAFor, S, I, SFor, and IFor.
What will be an ideal response?
| (a) | In equilibrium, Sd +  = Id +  so that 60 + 300rw = 105 - 600rw, or 900rw = 45, so rw = |
| (b) | Now 900rw = 0, so rw = 0.0. Using this in the formulas, we get S = 65, I = 30, CA = 35, SFor = 40, |
| (c) | Now 900rw = 90, so rw = 0.10. Using this in the formulas, we get S = 40, I = 55, CA = -15, SFor = |
Notice that the current account may swing from positive to negative, depending on the value of the real interest rate.
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