Final answer:
In this economics question, we calculate domestic investment, domestic saving, and net capital outflow using given formulas. We also determine the equilibrium real exchange rate and net exports. Additionally, we discuss the effects of an increase in the world interest rate on savings, investment, net capital outflow, and the real exchange rate. Finally, we examine the relationship between the world interest rate and domestic investment, domestic savings, and net capital outflow.
Step-by-step explanation:
a) To calculate domestic investment, you can use the formula I = S + (M-X) + (T - G). Given that Investment (I) = 200 - 15r and Saving (S) = 10 + 28r, you can substitute these values into the equation. Net capital outflow (NCO) is equal to the trade deficit (M - X). So, NCO = (M - X) = I - S - (T - G).
b) To find the equilibrium real exchange rate and net exports, you can use the equation NX = S - I, where NX is the trade balance. Substitute the given values in the equation and solve for X. Net exports (NX) can be found by substituting the value of X into the equation NX = 175 - 5X.
c) When the world interest rate increases to 6 percent, savings, investment, net capital outflow, and the real exchange rate will change. The higher interest rate will decrease domestic investment and increase net capital outflow, leading to a higher trade deficit. The real exchange rate will also change, but the specific direction of change depends on the relative magnitudes of the changes in investment and net capital outflow.
d) The world interest rate has a direct impact on domestic investment, domestic savings, and net capital outflow. When the world interest rate increases, domestic investment usually decreases as it becomes more expensive to borrow. Domestic savings may increase as individuals are incentivized to save more due to higher interest rates. The net capital outflow will generally increase as investors seek higher returns in other countries, resulting in a larger trade deficit.