Suppose the president of country A opens this economy to trade with the rest of the world in 2010. Furthermore, suppose that the investment demand is the same as in 2009. Now, instead of being provided the equilibrium level of SP, we are provided with the SP curve: r =0.025+0.000025Q, where r is still the real interest rate. We are also told that the capital inflow equals $200 billion in 2010. For this part of the problem assumed that the government has a balanced budget in the year 2010. Compute the new equilibrium quantity of LF demanded or supplied, and the equilibrium real interest rate in the year of 2010

What will be an ideal response?

Answer: Total supply of LF: r=0.025 + 0.000025(Q-200), that is, r=0.02+0.000025Q
Total demand of LF: r=0.05-0.000025Q. (Note that the total demand curve for LF is the same as I curve because we have balanced government budget in the year of 2010)
Find the equilibrium interest rate by setting demand equals supply, that is, 0.02+0.000025Q=0.05-0.000025Q, Q*=600, and r*=0.035.