Macroeconomics (9th Edition)
9th Edition
ISBN: 9780134167398
Author: Andrew B. Abel, Ben Bernanke, Dean Croushore
Publisher: PEARSON
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Question
Chapter 5, Problem 5NP
a)
To determine
To ascertain the national saving in the home country and in the foreign country as a functions of the world real interest rate.
b)
To determine
To ascertain the equilibrium values of the world real interest rate
c)
To determine
To ascertain the equilibrium values of consumption, national saving, investment, the current account balance, absorption in each country.
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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
Economics
Consider the following data for country B, an open economy, for this year:
Y = $14 trillion
C = $6 trillion
G = $2 trillion
NX = $3 trillion
T = $4 trillion
TR = $0.5 trillion
a) Find country B’s domestic investment.
b) Find country B’s private saving.
c) Find country B’s public saving.
d) Find country A’s national saving.
e) Find country B’s net foreign investment
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?
Chapter 5 Solutions
Macroeconomics (9th Edition)
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