Answer:
a. exchange rate = 1
b. exchange rate = 1.5
Explanation:
(a) National Saving = Private saving + public saving
Private saving = Y - C - T
=> Private saving = 5000 - (250 + 0.75(Y – T)) - 1000
=> Private saving = 5000 - (250 + 0.75(5000 – 1000)) - 1000 = 750
Public saving = T - G = 1000 - 1000 = 0
National saving = 750 + 0
= 750
Investment = 1000 - 50r = 1000 - 50*5
= 750
Y = C + I + G + NX
Trade Balance = Y - C - G - I = 5000 - (250 + 0.75(5000 – 1000)) - 1000 - 750 = 0
Thus Trade Balance = 0
NX = 0 => NX = 500 – 500e = 0
=> e = 1
Thus exchange rate = 1
(b)
National Saving = Private saving + public saving
Private saving = Y - C - T
=> Private saving = 5000 - (250 + 0.75(Y – T)) - 1000
=> Private saving = 5000 - (250 + 0.75(5000 – 1000)) - 1000 = 750
Public saving = T - G = 1000 - 1250 = -250
National saving = 750 - 250
= 500
Investment = 1000 - 50r = 1000 - 50*5
= 750
Y = C + I + G + NX
Trade Balance = Y - C - G - I = 5000 - (250 + 0.75(5000 – 1000)) - 1250 - 750 = -250
Thus Trade Balance = -250
NX = -250 => NX = 500 – 500e = -250
=> e = 750/500 = 1.5
Thus exchange rate = 1.5
