a)
To ascertain the national saving in the home country and in the foreign country as a functions of the world real interest rate.
a)
Explanation of Solution
H refers to home country,
Introduction: National savings are important for countries' economic development because the savings generate investment. Saving is an important indicator of economic development where it is used in every developing country to achieve
b)
To ascertain the equilibrium values of the world real interest rate
b)
Explanation of Solution
In equilibrium, one country’s CA surplus should equal to the other country’s CA deficit, thus we have:
So,
Introduction: The real rate of interest is the interest rate that a creditor, saver or lender earns after adjusting for inflation. It is also defined by the Fisher equation, that states the real interest rate is thenominal rate of interest minus the rate of inflation
c)
To ascertain the equilibrium values of consumption, national saving, investment, the current account balance, absorption in each country.
c)
Explanation of Solution
Introduction: The growth of an economy is affected by national savings. Consumption,
Want to see more full solutions like this?
Chapter 5 Solutions
Pearson Etext For Macroeconomics -- Access Card (10th Edition)
- Consider a small open economy that takes the world real interest rate as given. Suppose the world real interest rate is less than the country’s autarky real interest rate. Which of the following is TRUE? a. Domestic saving exceeds domestic investment b. There is capital outflow c. There is excess demand for capital d. None of the other optionsarrow_forwardWhat is the saving and investment equation? If national saving declines what will happen to domestic investment and net foreign investment?arrow_forwardConsider a hypothetical open economy. The following table presents data on the relationship between various real interest rates and national saving, domestic investment, and net capital outflow in this economy, where the currency is the dollar. Assume that the economy is currently experiencing a balanced government budget. NOTE: follow RED ARROWS for the order of the questions (IT IS PART OF THE SAME QUESTION!!!!!) NOTE: HERE ARE THE OPTIONS FOR THE BLANKS: Because of the relationship between net capital outflow and net exports, the level of net capital outflow at the equilibrium real interest rate implies that the economy is experiencing _____ (a trade deficit OR balanced trade OR a trade surplus) Now, suppose the government is experiencing a budget deficit. This means that ______ (national saving will increase OR national saving will decrease OR domestic investment will increase OR domestic investment will decrease), which leads to ______ (an increase in the supply of OR…arrow_forward
- You have the following annual figures for the New Zealand economy. Investment expenditure $42.5 billion Government savings -$1.7 billion Many politicians and commentators would like to see continued increases in investment and current account surpluses rather than deficits. If these events are to occur, what else must be happening in the economy? 1. The Government must raise the retirement age. 2. Government spending must fall 3. National savings (private and government) must rise 4. New Zealand must restrict foreign ownership of land and other assetsarrow_forwardBecause of the relationship between net capital outflow and net exports, the level of net capital outflow at the equilibrium real interest rate implies that the economy is experiencing (Balanced trade/ a trade deficit/ a trade surplus) Now, suppose the government is experiencing a budget deficit. This means that ( National saving will increase/ national saving will decrease/ Domestic investment will increase / domestic investment will decrease) which leads to ( an increase in the supply of / a decrease in the supply of / an increase in the demand for/ a decrease in the demand for) loanable funds. After the budget deficit occurs, suppose the new equilibrium real interest rate is 6%. The following graph shows the demand curve in the foreign-currency exchange market. Use the green line (triangle symbol) to show the supply curve in this market before the budget deficit. Then use the purple line (diamond symbol) to show the supply curve after the budget deficit. Summarize the…arrow_forwardWould each of the following transactions be included in net exports or net capital outflow? Be sure to say whether it would represent an increase or a decrease in that variable. A) A Malaysian buys a Sony TV. B) A Malaysian buys a share of Sony stock. C) The Japan pension fund buys a bond from the Malaysian treasury. D) A Japanese buys some durians from a Malaysian farmer.arrow_forward
- State whether each of the following events involves a financial flow to the Mexican economy or a financial flow out of the Mexican economy: a. Mexico imports services from Japan b. Mexico exports goods to Canada c. U.S. investors receive a return from past financial investments in Mexicoarrow_forwardSuppose that GDP is equal to 1,000, national saving is equal to 200, the current account deficit is equal to 100, and the government budget deficit is equal to 50. Private savings must equal （ ）arrow_forwardEconomics Consider a hypothetical open economy. The following table presents data on the relationship between various real interest rates and national saving, domestic investment, and net capital outflow in this economy, where the currency is the U.S. dollar. Assume that the economy is currently experiencing a balanced government budget. Real Interest Rate National Saving Domestic Investment Net Capital Outflow (Percent) (Billions of dollars) (Billions of dollars) (Billions of dollars) 7 60 30 -10 6 55 40 -5 5 50 50 0 4 45 60 5 3 40 70 10 2 35 80 15 Given the information in the preceding table, use the blue points (circle symbol) to plot the demand for loanable funds. Next, use the orange points (square symbol) to plot the supply of loanable funds. Finally, use the black point (cross symbol) to indicate the equilibrium in this market.arrow_forward
- Briefly explain whether each of the following statements is true or false. 8. An increase in national saving requires either a rise in investment or an increase in the capital account of the balance of payments.arrow_forwardConsider a small open economy with desired national saving of S^d=1000+1000r^w and desired investment of I^d=1000-500r^w. Calculate national saving, investment and the current account balance in equilibrium when the real world interest rate is: r^w=0.025 r^w=0.050 r^w=0.000 r^w=1.000arrow_forwardSuppose that you hold a piece of land in the City of London that you may want to sell in one year. As a U.S. resident, you are concerned with the dollar value of the land. Assume that, if the British economy booms in the future, the land will be worth £20 and one British pound will be worth $1.27. If the British economy slows down, on the other hand, the land will be worth less, i.e., £23 million, but the pound will be stronger, i.e., $1.40/£. You feel that the British economy will experience a boom with a 70% probability and a slow-down with the remaining probability.Estimate the expected value of the spot rate (USD X.XXXX)arrow_forward
