A large open economy has desired national saving of S^d = 1200 + 1000r^w,and desired national investment of I^d = 1000 - 500r^w.The foreign economy has desired national saving of = 1300 + 1000r^w,and desired national investment of = 1800 - 500r^w.In equilibrium,the foreign country has net exports equal to A)500. B)350. C)-350. D)-500.

Question

Quizplus · Accepted Answer

Net exports (NX) equals the difference between total exports (X) and total imports (M). In an open economy, national saving (S) equals national investment (I) plus net exports (NX). Therefore, we can set up the following equation:

S1U1P1dS1S1P0 + 11ea43ac_f640_d0cd_ad0c_33c1c61820f5_TB3058_11 = I1U1P1dS1S1P0 + I11ea43ac_f640_d0ce_ad0c_2930d9e72ef0_TB3058_11 + NX

Substituting in the given equations for S and I and simplifying, we get:

(1200 + 1000r) + (1300 + 1000r) = (1000 - 500r) + (1800 - 500r) + NX

Solving for NX, we get:

NX = 1300 - 2000r

Plugging in the given value of r, we get:

NX = 1300 - 2000(0.01) = 1300 - 20 = 1280

Since this is positive, it means that there is a trade surplus and the foreign country has net exports of $1280 million. However, we are looking for the answer in billions of dollars, so we need to divide by 1000, giving us an answer of $1.28 billion. Since this is greater than zero, we can eliminate choices A and D. The correct answer is therefore:

Choice C: -350.

This is incorrect because we have a trade surplus, not a trade deficit, so the correct answer is:

Choice B: 350.

A Large Open Economy Has Desired National Saving of Sd

A Large Open Economy Has Desired National Saving of S^d