Macroeconomics
10th Edition
ISBN: 9780134896441
Author: ABEL, Andrew B., BERNANKE, Ben, CROUSHORE, Dean Darrell
Publisher: PEARSON
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Chapter 5, Problem 8RQ
To determine
To Analyze: TheEffect of large country’s increase in desired national saving on world’s other macro economics parameter.
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When there are two large open economies in the world, if capital goods become relatively
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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
Fully examine the circular flow diagram of an open economy. Apply the circular flow diagram to a country of your choice.
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- 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; fallarrow_forwardExplain briefly what international investment law does. Why is it important? Is it a good or bad thing?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
- For a small open economy, the domestic real interest rate (r) for a given country must be the same as the world real interest rate (r). only if capital is not perfectly mobile because with no barriers to capital flows, if the world rate > domestic rate the domestic residents would just lend abroad putting upward pressures on the domestic rate until both rates equal each other because with no barriers to capital flows, if the world rate < the domestic rate domestic residents would only lend to foreigners putting downward pressures on the domestic rate until both rates equal each other for none of these reasons for all of these reasonsarrow_forwardwhy is the recovery of global economy, especially the Euro Zone, so important to the South African Economy.arrow_forwardLet’s assume that some foreign countries start to subsidize investment by instituting an investmenttax credit.a) What happens to world investment demand as a function of the world interest rate?b) What happens to the world interest rate?c) What happens to investment in our small open economy?d) What happens to our trade balance?e) What happens to our real exchange rate?arrow_forward
- 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?arrow_forwardExplain why, in a small open economy, national saving can be less than investment. Use a savings-investment graph to explainarrow_forwardDiscuss the circular flow diagram of an open economy. Apply the circular flow diagramto a country of your choice.arrow_forward
- Explain why a developing country with a fixed exchange rate Explain why a developing country with a fixed exchange rate and foreign exchange controls in place (perfectly immobile capital) may find itself dependent on growth in exports, foreign investment, or foreign aid to attain economic growth. Explain why a developing country with a fixed exchange ratearrow_forwardSuppose that several large foreign countries decrease government spending, leading to an increase in the level of world savings. In a small open economy, which of the following is most likely to occur? Increase in the trade deficit Decrease in investment Increase in net capital outflow Decrease in savingarrow_forwardThe 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?arrow_forward
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