Evaluate the government budget

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Question: 1. Assume a small open economy where: Y=2K0.7L0.3;C=150+0.6(Y-T);I=200-45Rw; NX=300-50S; K=400; L=400; T=150; G=200; Rw=3.

a) Evaluate the government budget.

b) Find the value of national, private, and publicsaving.

c) Find the long run equilibrium real exchange rate(S).

d) Compute the trade balance (often used as proxy for current account balance).

e) Suppose that congress decides to adjust government purchases in order to achieve a balanced budget. Compute the implications of such policy on long run equilibrium real exchange rate, saving, investment, and trade balance.

f) Draw your results from part c) and e) in a single graph and provide an economic interpretation for the expected transition.

Reference no: EM132208249

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