The effect of increase in the domestic willingness to save on the national saving, investment, current account balance and real interest rate.

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Answer 1

Question

Chapter 5, Problem 5AP

a)

To determine

To find: The effect of increase in the domestic willingness to save on the national saving, investment, current account balance and real interest rate.

b)

To determine

To find: The effect of increase in the foreign country’s willingness to save on the national saving, investment, current account balance and real interest rate.

c)

To determine

To find: The effect of increase in temporary spending on the national saving, investment, current account balance and real interest rate.

d)

To determine

To find: The effect of increase in taxes on the national saving, investment, current account balance and real interest rate.

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Consider a world with only two countries (i.e., two large open economies), the home country and the foreign country. In the home country the following relationships hold: { refer to image } b) Suppose that in the home country the desired investment increases by 100, that is, I^d = 400−100r^w. What is the world equilibrium interest rate? What are the equilibrium values of consumption, national saving, investment, and the current account balance in each country?

The following equations describe a small open-economy: C = 10 + 0.5Y I = 160 - 50r NX = 80 - 0.1Y - e e = 50 - 0.1Y + B (r-r*) G= 10 where C is consumption, I is investment, Y is domestic output, r is the domestic real interest rate, NX is net exports, e is the real exchange rate, G is government spending and r* is the foreign real interest rate. (a) Suppose that ß is fairly small, ß = 5, full employment output is Y = 400 and r* = 0.1. What is the equilibrium value of the domestic interest rate, r? (b) Consider instead that ß is fairly large, B = 1000, where again Y = 400 and r* = 0.1. What is the equilibrium value of the domestic interest rate? (c) What happens to r as ß increases? Does r converge to r* as ß approaches infinity? What type of small open economy model does this resemble?

You have the following annual figures for the New Zealand economy. Investment expenditure $40.6 billion Net Exports $3.6 billion Net Foreign Income -$9.5 billion The current account balance is equal to $____billon (use 1 d.p. and a negative sign if the balance you have calculated is a deficit). New Zealand domestic savings is equal to $____billon (use 1 d.p.). Suppose that the government introduces a policy that bans foreign investment in New Zealand. If that happens then (everything else held constant) we would expect to see the current account balance -rise -remain the same. -fall -become harder to predict Suppose that along with the above policy, the government also wishes to see investment levels maintained. If that is to occur, what else must be happening in the economy? - The Government must raise taxes. - Firms must be offered incentives to invest. - New…

Answer 2

Question

Chapter 5, Problem 5AP

a)

To determine

To find: The effect of increase in the domestic willingness to save on the national saving, investment, current account balance and real interest rate.

b)

To determine

To find: The effect of increase in the foreign country’s willingness to save on the national saving, investment, current account balance and real interest rate.

c)

To determine

To find: The effect of increase in temporary spending on the national saving, investment, current account balance and real interest rate.

d)

To determine

To find: The effect of increase in taxes on the national saving, investment, current account balance and real interest rate.

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Answer 3

Question

Chapter 5, Problem 5AP

a)

To determine

To find: The effect of increase in the domestic willingness to save on the national saving, investment, current account balance and real interest rate.

b)

To determine

To find: The effect of increase in the foreign country’s willingness to save on the national saving, investment, current account balance and real interest rate.

c)

To determine

To find: The effect of increase in temporary spending on the national saving, investment, current account balance and real interest rate.

d)

To determine

To find: The effect of increase in taxes on the national saving, investment, current account balance and real interest rate.

Expert Solution & Answer

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Answer 4

Question

Chapter 5, Problem 5AP

a)

To determine

To find: The effect of increase in the domestic willingness to save on the national saving, investment, current account balance and real interest rate.

b)

To determine

To find: The effect of increase in the foreign country’s willingness to save on the national saving, investment, current account balance and real interest rate.

c)

To determine

To find: The effect of increase in temporary spending on the national saving, investment, current account balance and real interest rate.

d)

To determine

To find: The effect of increase in taxes on the national saving, investment, current account balance and real interest rate.

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Answer 5

Chapter 5, Problem 5AP

a)

To determine

To find: The effect of increase in the domestic willingness to save on the national saving, investment, current account balance and real interest rate.

b)

To determine

To find: The effect of increase in the foreign country’s willingness to save on the national saving, investment, current account balance and real interest rate.

c)

To determine

To find: The effect of increase in temporary spending on the national saving, investment, current account balance and real interest rate.

d)

To determine

To find: The effect of increase in taxes on the national saving, investment, current account balance and real interest rate.

Answer 6

Chapter 5, Problem 5AP

a)

To determine

To find: The effect of increase in the domestic willingness to save on the national saving, investment, current account balance and real interest rate.

Answer 7

Chapter 5, Problem 5AP

a)

To determine

To find: The effect of increase in the domestic willingness to save on the national saving, investment, current account balance and real interest rate.

Answer 8

b)

To determine

To find: The effect of increase in the foreign country’s willingness to save on the national saving, investment, current account balance and real interest rate.

Answer 9

b)

To determine

To find: The effect of increase in the foreign country’s willingness to save on the national saving, investment, current account balance and real interest rate.

Answer 10

c)

To determine

To find: The effect of increase in temporary spending on the national saving, investment, current account balance and real interest rate.

Answer 11

c)

To determine

To find: The effect of increase in temporary spending on the national saving, investment, current account balance and real interest rate.

Answer 12

d)

To determine

To find: The effect of increase in taxes on the national saving, investment, current account balance and real interest rate.

Answer 13

d)

To determine

To find: The effect of increase in taxes on the national saving, investment, current account balance and real interest rate.

Answer 14

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Answer 15

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Answer 16

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Answer 17

Ch. 5 - Prob. 1RQ Ch. 5 - Prob. 2RQ Ch. 5 - Prob. 3RQ Ch. 5 - Prob. 4RQ Ch. 5 - Prob. 5RQ Ch. 5 - Prob. 6RQ Ch. 5 - Prob. 7RQ Ch. 5 - Prob. 8RQ Ch. 5 - Prob. 9RQ Ch. 5 - Prob. 10RQ

The effect of increase in the domestic willingness to save on the national saving, investment, current account balance and real interest rate.

Solution Summary: The author analyzes the effect of increase in the domestic willingness to save on the national saving, investment, current account balance, and real interest rate.

To find: The effect of increase in the domestic willingness to save on the national saving, investment, current account balance and real interest rate.

To find: The effect of increase in the foreign country’s willingness to save on the national saving, investment, current account balance and real interest rate.

To find: The effect of increase in temporary spending on the national saving, investment, current account balance and real interest rate.

To find: The effect of increase in taxes on the national saving, investment, current account balance and real interest rate.

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