EBK MACROECONOMICS
10th Edition
ISBN: 9780134896571
Author: CROUSHORE
Publisher: VST
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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:
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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
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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.
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