Macroeconomics
10th Edition
ISBN: 9780134896441
Author: ABEL, Andrew B., BERNANKE, Ben, CROUSHORE, Dean Darrell
Publisher: PEARSON
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Question
Chapter 5, Problem 7RQ
To determine
Relationship between the current accounts of two countries when world real interest rate is at its equilibrium value.
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Draw a diagram for Saving and Investment in a small open economy.Assume the world real interest rate is above the closed equilibrium interestrate for the country you drew. Is this country a foreign lender or foreignborrower? Explain with the intuition of the saving and investment functions
When there are two large open economies in the world, if capital goods become relatively
cheaper compared to consumption goods in the foreign country, the world real interest rate will
and the home country's current account will
fall; rise
fall; fall
rise; rise
rise; fall
How does each of the following changes affect the real gross domestic product and price level of an open economy in the short run? Explain. The depreciation of the country’s currency in the foreign exchange market.
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- Q4. Suppose that Brazil initially has a higher capital rental rate (r) than the United States. What would be the direction of foreign direct investment (FDI)? Use a world-capital-market graph to show the effects of FDI on the two countries’ rental rates of capital, GDP, and return to labor owners. Identify the net change in world output in the above graph. Discussion: what other effects could FDI cause in the recipient and source countries that are not captured in the model? Your answerarrow_forwardExplain how changes in various economic factors affect a country's current account balance.arrow_forwardFor a small open economy with production and investment, what are the immediate effects on output and the current account when there is a rise in the world interest rate?arrow_forward
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