Exam 5: Saving and Investment in the Open Economy

Consider a small open economy with desired national saving of S^d = 20 + 200r^w and desired investment of I^d = 30 - 200r^w. Calculate national saving,investment,and the current account balance in equilibrium when the real world interest rate is (a)r^w = 0.025. (b)r^w = 0.05. (c)r^w = 0.0. (d)Now suppose something causes desired national saving to increase by 10,so that it is now S^d = 30 + 200r^w.Repeat parts (a),(b),and (c). (e)Suppose,with desired national saving at its original level of S^d = 20 + 200r^w,something causes desired investment to rise by 10,to I^d = 40 - 200r^w.Repeat parts (a),(b),and (c).

Consider a large open economy that has a positive current account balance. (a)Suppose the domestic government increases the tax rate on firm revenues.Draw a diagram to explain the effects on the world real interest rate,saving in each country,investment in each country,and the current account balance in each country in equilibrium.Explain your work. (b)In addition to the tax increase in part (a),suppose now that the foreign government increases lump-sum taxes on individuals.Draw a new diagram to incorporate the overall effects of both tax changes and explain the effects (from the initial equilibrium with neither tax change)on the world real interest rate,saving in each country,investment in each country,and the current account balance in both countries.Explain your work.

Suppose a wealthy Canadian donates $10 million to charities in Mexico.Mexican net exports ________ and the current account balance ________.

Consider a large open economy.What are the effects,in equilibrium,on the world real interest rate,domestic national saving,domestic investment,the domestic current account balance,foreign national saving,foreign investment,and the foreign current account balance in each of the following scenarios? Show a diagram to illustrate your results. (a)current income rises in the foreign country (b)the future marginal product of capital rises in the domestic country (c)wealth rises in the foreign country

Suppose output is $35 billion,government purchases are $10 billion,desired consumption is $15 billion,and desired investment is $6 billion.Net foreign lending would be equal to

What determines the interest rate in a small open economy?

Net exports of goods are known as

When there are two large open economies,the world real interest rate will be such that

Which of the following would be part of the nation's financial account?

If there is an increase in taxes on business firms in a small open economy,it causes the current account to ________ and the equilibrium quantity of saving to ________.

Suppose the government of a small open economy reduces its spending,so that national saving increases.The result is

Consider a small open economy with desired national saving of S^d = 200 + 10,000r^w and desired investment of I^d = 1000 - 5000r^w.If r^w = 0.05,then a rise in government spending of 50 with no change in private saving causes net exports to become

Consider a small open economy in equilibrium with a current account deficit. (a)Draw a diagram showing this situation. (b)What happens to national saving,investment,and the current account balance in equilibrium if government expenditures rise temporarily? Show this result in your diagram.

Due to a change in the regulatory structure of a small open economy,the desired capital stock becomes higher for both private investment and government investment.Increased government investment spending is financed by borrowing,not by higher taxes.If both desired investment and government spending rise at the same time,will there be "twin deficits"?

A large open economy's real interest rate will decrease if

Consider a small open economy in equilibrium with a zero current account balance.What happens to national saving,investment,and the current account balance in equilibrium if (a)future income rises? (b)business taxes rise? (c)government expenditures decline temporarily? (d)the future marginal product of capital rises?

If there is a decrease in taxes on business firms in a small open economy,it causes the current account to ________ and the equilibrium amount of saving to ________.

Assume that an increase in Costa Rica's government budget deficit reduced desired national saving by 10 million colon.Assuming Costa Rica is a small open economy,you would expect the government's action to

If France has a trade deficit,then

A small open economy has a current account balance of zero.A rise in the world real interest rate causes