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USA Initial Conditions Cd = 310 + 0.4(Y-T) – 200rw Id = 120 – 200rw Y...

USA Initial Conditions

Cd = 310 + 0.4(Y-T) – 200rw
Id = 120 – 200rw
Y = 1000
T = 200
G =275

China Initial Conditions

CdF = 480 + .4(YF – TF) – 300rw
IdF = 255 – 300rw
YF = 1500

TF = 300
GF = 300

a) (5 points) What is the equilibrium real interest rate that clears the international goods market? Show all work.

b) (5 points) Compare the level of absorption in each country to the income generated in each country. Is the US spending beyond its means? Is China the lender? Draw two diagrams side by side, with the USA on the left and China country on right. Locate this initial equilibrium as points A on both diagrams (there are four point A’s, two on each diagram). Be sure to label diagrams completely labeling the trade deficit/surplus on each graph, etc. (10 points for correct and completely labeled diagram)

c) (5 points) Now let the US conduct expansionary fiscal policy so that G rises by 300 to 575. We assume that the government spending multiplier (ΔY/ΔG) is 1.5. Re-calculate the new equilibrium real interest rate that clears the international goods market and the associated new levels of desired savings and investment for each country and label these new equilibrium points on your existing diagram as point B. Please show all work.   

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Expert Solution

Rahul Sunny answered 1 year ago
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