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Let's say there are only two countries in the entire world, Argentina and Chile, and there is free trade between them. The aggregated investments in both countries are $I^A$ and $I^C$ that are both exogenous variables. The saving is giving by $S^A = A+ar$ where A,a> for Argentina and for Chile it is given by S^C that is an exogenous variable. I have to find the equilibrium interest rate. My TA said it is the one that equates the total savings and the total investments in both countries. $$S^A+S^C = I^A + I^C$$ $$A+ar+S^C = I^A + I^C$$ Solving for r we get $$r = \frac{I^A+I^C-A-S^C}{a}$$ But my TA said this was wrong. What am I missing here?

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  • $\begingroup$ In your final equation for r, it looks like you've divided by A rather than a. Could this be the error? $\endgroup$ Jan 12 at 13:42
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    $\begingroup$ Of course! That must have been it, because I can't see any other error. $\endgroup$ Jan 12 at 14:27
  • $\begingroup$ what assumptions you can make about I, I^C and S^C? are they exogenous? $\endgroup$
    – WilliamT
    Jan 12 at 17:27

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