PLEASE NOTE: if you\'re writing on paper please write clearly and do not write i

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PLEASE NOTE: if you're writing on paper please write clearly and do not write in script. Please don't answer the question unless you can write clearly. Thank you I appreciate it :)

Question #2: Explain why, in a small open economy a. National savings does not have to equal investment. When the world real interest rate is lower than the domestic real interest rate how can the lower amount of savings be in equilibrium with a greater amount of investment? b. Suppose this small country experiences a severe drought. What would happen to its current account surplus? c.

Explanation / Answer

a) National Saving dos not have to equal investment in a small open economy because savings equal investment plus net capital outflow. If net capital outflow is not equal to zero then domsetic saving does not equal to domestic investment.

b) When the world real interest rate is lower than the domestic real interest rate then the lower amount of savings be in equilibrium with a greater amount of investment because of large capiatl inflow which takes place due to higher domestic rela interest rate.

c) If the small country experiences a severe drought then its current account surplus will fall. This is because in drought situation this country will import more which will convert current account surplus into deficit.

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