Question

In a small open economy output (gross domestic product is 25 billion government purchases are 6 billion

Answer 1

In a small open economy, output (gross domestic product) is $25 billion, government purchases are $6 billion, and net factor payments from abroad are zero. Desired consumption and desired investment are related to the world real interest rate in the following manner:

World Real Interest Rate

Desired Consumption

Desired Investment

5%

$12 billion

$3 billion

4%

$13 billion

$4 billion

3%

$14 billion

$5 billion

2%

$15 billion

$6 billion

For each value of the world real interest rate, find national saving, foreign lending, and absorption. Calculate net exports as the difference between output and absorption.