Question

in a small open economy with full employment, consumption
depends only on disposable income. National saving is 300,
investment is given by *I* = 400 – 20*r*, where
*r* is the real interest rate measured in percentage, and
the world real interest rate is 10 percent.

Compute the investment, trade balance, and net capital outflow.

Answer #1

Given :

1. Small open economy with full employment

2. Consumption depends only on disposable income. i.e. C =
f(Y^{d})

3. National saving is 300 i.e. S

4. Investment is given by *I* = 400 – 20*r*, where
*r* is the real interest rate measured in percentage

5. The world real interest rate is 10 percent.

Compute the investment, trade balance, and net capital outflow.

In an open economy,

S = NX - I

300 = NX - (400 - 20r)

Now as the economy given is a small open economy hence it will take the world interest rate as given i.e. r = 10

300 = NX - (400 - 20*10)

300 = NX - 200

NX = 500 implies Net capital outlow of -500 because Balance of payment account has to been zero

Investment will be 200

Trade balance will be 500

Net capital outflow will be -500

Consider a small open economy with desired national saving of Sd
= 1000 + 1000rw and desired investment of Id = 1000 - 500rw.
Calculate national saving, investment, and the current account
balance in equilibrium when the real world interest rate is
(a) rw = 0.025. (b) rw=0.05. (c) rw = 0.0.

1. An economy has full-employment output of 5000. Government
purchases are 1000. Desired consumption and desired investment are
given by
Cd= 3600 - 2000r + 0.10Y
Id = 1200 - 4000r
where Y is output and r is the expected real interest rate.
(a) Find the real interest rate that clears the goods market.
Assume that output equals full-employment output.
(b) Calculate the amount of saving, investment, and consumption
in equilibrium.

Assume that the world works according to the Classical model. In a
small open economy, output is produced according to a Cobb-Douglas
production function, consumption is equal to C=40+0.6(Y-T) and the investment
function is I=280-10r. You
know that the output produced is Y=900, government spending is
G=150, taxes are
T=90 and that the world
real interest rate is 4% (r*=4).
In
all the questions below, make sure to explain your answers and show
all your work.
a.
Compute: i. Private...

Think about a small open economy. Its government announces that
they will have a tax cut of $200 million this year,
and there will be a tax increase of $210 million
next year, when the interest rate is 5%.
Question: If Ricardian equivalence does not
hold, what are the effects of this change (tax cut and subsequent
tax increase) on
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The
components of planned aggregate spending in a certain economy are
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Planned Investment: I p = 400–3000r Government Revenue and
Spending: T = 300 and G = 450 Net Export: NX = 75 where r is the
real interest rate (For example, r = 0.01 means that the real
interest rate is 1 percent). (1) Find the level of public saving.
(2) Suppose that the real interest...

3. The components of planned aggregate spending in a certain
economy are given by Consumption Function: C = 800 + 0.75(Y - T) –
2000r
Planned Investment: Ip = 400–3000r
Government Revenue and Spending: T = 300 and G = 450 Net Export: NX
= 75
where r is the real interest rate (For example, r = 0.01 means
that the real interest rate is 1 percent). (1) Find the level of
public saving.
(2) Suppose that the real interest...

A small open economy responds to a domestic
epidemic with lockdowns that sharply reduce private consumption.
This causes the world real interest rate to ________ and the
country's current account balance to ________.
A.
remain unchanged; rise
B.
rise; rise
C.
rise; fall
D.
remain unchanged; fall

Consider a large open economy that has a zero-current account
balance. What are the effects on the world real interest rate,
national saving, investment, and the current account in equilibrium
if:
(a) future income rises?
(b) business taxes decline? Explain using graphs.
(For full credit make sure you label the axes and the
curves)

If the economy is close to full employment, an increase in
government purchase (G) will __________ in the long run.
a) reduce all of consumption, net exports and investment through
the wealth, interest rate and international trade effects
b) reduce both consumption and investment through the wealth and
interest rate effects
c) reduce only net exports through the international trade
effect reduce only investment through the interest rate effect
d) reduce only consumption through the wealth and interest rate
effects

Question 1
The relationship between consumption and disposable income is
such that as
consumption rises, disposable income falls
disposable income rises, consumption falls
disposable income rises, consumption rises
disposable income rises, saving falls
Question 2
The federal government’s principal tool in altering consumer
spending is
changing corporate taxes
changing federal sales taxes
changing unemployment insurance benefits
changing personal income taxes
Question 3
The difference between disposable income and consumption
spending is
transfer payments
personal taxes
saving
personal investment
Question 4...

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