please show all math for each part: Assume that in a small open economy with ful
ID: 1105681 • Letter: P
Question
please show all math for each part:
Assume that in a small open economy with full employment, consumption depends only on disposable income. National saving is 300, investment is given by I = 400 – 20r, where r is the real interest rate in percent, and the world interest rate is 10 percent.
a.
If government spending rises by 100, does investment change? What is the level of investment after the change?
b.
Does the trade balance change if G rises by 100? If it changes, does it increase or decrease, and by how much?
c.
Does net capital outflow change if G rises by 100? If it changes, does it increase or decrease, and by how much?
d.
Will the real exchange rate rise, fall, or remain constant as a result of the change in
G?
a.
If government spending rises by 100, does investment change? What is the level of investment after the change?
b.
Does the trade balance change if G rises by 100? If it changes, does it increase or decrease, and by how much?
c.
Does net capital outflow change if G rises by 100? If it changes, does it increase or decrease, and by how much?
d.
Will the real exchange rate rise, fall, or remain constant as a result of the change in
G?
Explanation / Answer
a) increase in government spending doesn't change the investment as investment is the function of interest rate.
Level of investment= I= 400 - (20*10)=200
Answer- No and 200
b) in equilibrium in case of open economy, Y=C+I+G+NX
If G increases, other things hold fixed, NX must decrease by the amount of increase in G.
Answer- Yes, it decreases by 200.
C) in case of open economy, capital outflow = NX
So, if G rises by 100 then Capital outflow must decrease by 100.
Answer- Yes It decreases by 200.
d). Real exchange rate should adjust to equilibrate equilibrium Y and modify NX. So, it will rise with rise in G.
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