Final answer:
For e is 1: Interest rate (r) is 0, Net exports (NX) is 0, Net capital flows (CF) is 0.
For e is 1.5: Interest rate (r) is 2.5, Net exports (NX) is -250, Net capital flows (CF) is -250.
For e is 2: Interest rate (r) is 5, Net exports (NX) is -500, Net capital flows (CF) is -500.
Step-by-step explanation:
The given equations represent a large open economy model. Let's solve for the interest rate (r), net exports (NX), and net capital flows (CF) when the real exchange rate (e) is 1, 1.5, and 2.
Given:
1) Y = 5,000
2) Y = C + I + G + NX
3) C = 1/2 (Y - T)
4) I = 2,000 - 100r
5) NX = 500 - 500e
6) CF = -100r
7) CF = NX
8) G = 1,500
9) T = 1,000
We'll start by substituting known values:
From equation 2: 5,000 = C + I + 1,500 + NX
From equation 3: C = 1/2 (5,000 - 1,000) = 2,000
So, 5,000 = 2,000 + I + 1,500 + NX
I = 5,000 - 2,000 - 1,500 - NX
I = 1,500 - NX
Equation 6 and 7 imply CF = NX:
CF = -100r = NX
Given different values of e:
For e = 1:
NX = 500 - 500(1) = 0
CF = NX = 0
r = CF / (-100) = 0
For e = 1.5:
NX = 500 - 500(1.5) = -250
CF = NX = -250
r = CF / (-100) = 2.5
For e = 2:
NX = 500 - 500(2) = -500
CF = NX = -500
r = CF / (-100) = 5
Interest rates and net exports for different real exchange rates:
- e = 1: Interest rate (r) = 0, Net exports (NX) = 0, Net capital flows (CF) = 0
- e = 1.5: r = 2.5, NX = -250, CF = -250
- e = 2: r = 5, NX = -500, CF = -500