# Suppose the country of Nepal, a small open economy can be described by the following equations: Y…

Suppose the country of Nepal, a small open economy can be
described by the following equations:

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Suppose the country of Nepal, a small open economy can be described by the following equations: Y…
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Y = C + I + G + NX

Y = 5000

G = 1000

T = 1000

C = 250 + 0.75(Y – T)

I = 1000 – 50r

NX = 500 – 500e

r = r* = 5

(a) For this economy calculate (i) national savings [2 Points]
(ii) level of investment [2 Points] (iii) net exports [2 Points]
(iv) equilibrium exchange rate [2 Points]

(b) Suppose that Nepal increases its government spending.
Illustrate graphically the effects of this fiscal policy using the
model of the small open economy. In your graph clearly label your
axis and curves. Based on your graph what happens to the national
savings, investment, the trade balance and the equilibrium exchange
rate for Nepal? [8 Points]

(c) Suppose we know the magnitude of the increase in government
spending by Nepal. Government spending (G) rises to 1250. Solve
numerically for national savings, investment, the trade balance,
and the equilibrium exchange rate. Confirm the variables shifted in
the direction your graph predicted from Part (b). [8 Points]