Assume that the following equations characterize a large open economy:
(1) Y = 2(G+T)
(2) Y = C + I + G + NX
(3) C = 1/2(Y – T)
(4) I = 2,100 – 100r
(5) NX = 500 – 500e
(6) CF = –200r
(7) CF = NX
(8) G = 1,500
(9) T = 1,000.
Where NX is net exports, CF is net capital outflow, and e is the real exchange rate. Solve these equations for the equilibrium values of C, I, NX, CF, r, and e. (Hint: Substitute equations (9) and (1) into (3), then substitute (1), (3), (4), (8), and (5) into (2). Then substitute (5) and (6) into (7). Now you have two equations in r and e. Check your work by seeing that all of these equations balance given your answers. Start: Write equation (2) as Y = C + I + G + CF, since NX=CF and then get equilibrium r)