HOMEWORK # 4 Savings and Investment in the Open Economy #1 Suppose the current a
ID: 1140183 • Letter: H
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HOMEWORK # 4 Savings and Investment in the Open Economy #1 Suppose the current account shows debits of $6 billion and credits of $5 billion. The current account (CA) balance is and the capital and financial account (KFA) balance is Figure 1 Output Government Purchases Desired Consumption Desired Investment Next Exports $ 50 $ 15 $ 20 $ 5 Image Copyright Protected 6 6254739FRE 278 12221 PDK 3587 ASE299384 #2 In Figure 1, net foreign lending would be equal to (in $)? #3 In Figure 1, desired investment equals (in $)? #4 A small open economy has a current account balance of zero. An increase in its savings causes SHOW GRAPH #5 A small open economy has a current account balance of zero. It has a positive investment shock (which causes it desire more investment), it causes the current account to lending to other countries to SHOW GRAPH and #6 A large open economy (which is a net borrower at the start) increases its investment demand. This causes the world real interest rate to SHOW GRAPH _and the world to lend #7 A large open economy (which is a net borrower at the start) increases its savings. This causes the world real interest rate to SHOW GRAPH and the world to lendExplanation / Answer
•The current account (CA): measures a country’s trade in currently produced goods and services.
•The capital and financial account (KFA) measures a country’s trade in financial assets
Thus, using the Accounting Identity
CA+KFA=0
where, CA = credit - debit
= $5 bn - $6 bn = -$1 bn
using the accounting identity: KFA = $1bn
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