A country's domestic supply of saving, domestic demand for saving for purposes of capital formation, and supply of net capital inflows are given by the following equations: S=1,200+2,000r I=1,700-4,000r KI=-100+6,000r Instructions: Enter real interest as percent values rounded to one decimal place. If you are entering any negative numbers, be sure to include a(-) in front of those numbers. a. Assuming that the market for saving and investment is in equilibrium, find the current values for national saving, capital inflows ,domestic investment, and the real interest rate. Real interest: square % National Savings: square Capital inflows: square Investment: square b. Assuming that desired national saving declines by 120 at each value of the real interest rate. Determine the effects of this reduction in domestic saving on the following values: Real interest: square % National Savings: square Capital inflows: square Investment: square c. Assume instead that concerns about the economy's macroeconomic policies case capital inflows to fall sharply so that now KI=-760+6,000r Determine Real interest: square %

To solve these problems, we need to find the equilibrium where national saving (S) plus capital inflows (KI) equals domestic investment (I). This is because in an open economy, the sum of national savings and net capital inflows must equal investment.<br /><br />### Part a<br /><br />1. **Equilibrium Condition:**<br /> \[<br /> S + KI = I<br /> \]<br /><br />2. **Substitute the given equations:**<br /> \[<br /> 1,200 + 2,000r - 100 + 6,000r = 1,700 - 4,000r<br /> \]<br /><br />3. **Combine like terms:**<br /> \[<br /> 1,100 + 8,000r = 1,700 - 4,000r<br /> \]<br /><br />4. **Solve for \( r \):**<br /> \[<br /> 8,000r + 4,000r = 1,700 - 1,100<br /> \]<br /> \[<br /> 12,000r = 600<br /> \]<br /> \[<br /> r = \frac{600}{12,000} = 0.05<br /> \]<br /><br />5. **Convert \( r \) to percentage:**<br /> \[<br /> r = 5\%<br /> \]<br /><br />6. **Calculate National Savings (S):**<br /> \[<br /> S = 1,200 + 2,000 \times 0.05 = 1,300<br /> \]<br /><br />7. **Calculate Capital Inflows (KI):**<br /> \[<br /> KI = -100 + 6,000 \times 0.05 = 200<br /> \]<br /><br />8. **Calculate Investment (I):**<br /> \[<br /> I = 1,700 - 4,000 \times 0.05 = 1,500<br /> \]<br /><br />**Answers for Part a:**<br />- Real interest: \( 5\% \)<br />- National Savings: \( 1,300 \)<br />- Capital inflows: \( 200 \)<br />- Investment: \( 1,500 \)<br /><br />### Part b<br /><br />Assuming that desired national saving declines by 120 at each value of the real interest rate:<br /><br />1. **New Saving Equation:**<br /> \[<br /> S = 1,080 + 2,000r<br /> \]<br /><br />2. **Equilibrium Condition:**<br /> \[<br /> 1,080 + 2,000r + (-100 + 6,000r) = 1,700 - 4,000r<br /> \]<br /><br />3. **Combine like terms:**<br /> \[<br /> 980 + 8,000r = 1,700 - 4,000r<br /> \]<br /><br />4. **Solve for \( r \):**<br /> \[<br /> 12,000r = 720<br /> \]<br /> \[<br /> r = \frac{720}{12,000} = 0.06<br /> \]<br /><br />5. **Convert \( r \) to percentage:**<br /> \[<br /> r = 6\%<br /> \]<br /><br />6. **Calculate New National Savings (S):**<br /> \[<br /> S = 1,080 + 2,000 \times 0.06 = 1,200<br /> \]<br /><br />7. **Calculate New Capital Inflows (KI):**<br /> \[<br /> KI = -100 + 6,000 \times 0.06 = 260<br /> \]<br /><br />8. **Calculate New Investment (I):**<br /> \[<br /> I = 1,700 - 4,000 \times 0.06 = 1,460<br /> \]<br /><br />**Answers for Part b:**<br />- Real interest: \( 6\% \)<br />- National Savings: \( 1,200 \)<br />- Capital inflows: \( 260 \)<br />- Investment: \( 1,460 \)<br /><br />### Part c<br /><br />Assume capital inflows equation changes to \( KI = -760 + 6,000r \):<br /><br />1. **Equilibrium Condition:**<br /> \[<br /> 1,200 + 2,000r + (-760 + 6,000r) = 1,700 - 4,000r<br /> \]<br /><br />2. **Combine like terms:**<br /> \[<br /> 440 + 8,000r = 1,700 - 4,000r<br /> \]<br /><br />3. **Solve for \( r \):**<br /> \[<br /> 12,000r = 1,260<br /> \]<br /> \[<br /> r = \frac{1,260}{12,000} = 0.105<br /> \]<br /><br />4. **Convert \( r \) to percentage:**<br /> \[<br /> r = 10.5\%<br /> \]<br /><br />**Answer for Part c:**<br />- Real interest: \( 10.5\% \)