Assume that in a small open economy where full employment always prevails, national saving is 300.
a.
If the domestic investment is given by I = 400 - 20r, where r is the real interest rate in percent, what would the equilibrium interest rate be if the economy were closed?
b.
If the economy is open and the world interest rate is 10 percent, what will the investment be?
c.
What will the current account surplus or deficit be? What will net capital outflow be?
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Assume that in a small open economy where full employment always prevails, national saving is 300.
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Related textbook solutions
Related questions
For the economy described below:
| C |
= 2,500 + 0.9(Y -T) - 10,000r |
| I p |
= 2,200 - 10,000r |
| G |
= 2,200 |
| NX | = 0 |
| T |
= 3,500 |
a. Suppose that potential output Y* equals 27,500. What real interest rate should the Fed set to bring the economy to full employment? You may take as given that the multiplier for this economy is 10.
Instruction: Enter your response as an integer value.
The real rate of interest: % =?
b. Suppose that potential output Y* equals 23,500. What real interest rate should the Fed set to bring the economy to full employment? You may take as given that the multiplier for this economy is 10.
Instruction: Enter your response as an integer value.
The real rate of interest: % =?
c. Show that the real interest rate determined in part a sets national saving equal to planned investment when the economy is at potential output. This result shows that the real interest rate must be consistent with equilibrium in the market for saving when the economy is at full employment.
Instruction: Enter your response as an integer value.
Planned investment I p =.
National saving S =.
