Use a saving-investment diagram to explain what happens tothe current account of

Question

Use a saving-investment diagram to explain what happens tothe current account of a small openeconomy with perfect capitalmobility in each of the following scenarios.

(a) Current output rises due to a temporary productivityincrease.

(b) The tax code changes so that business firms face highertax rates on their revenues (lump-sum

tax changes also occur such that overall tax revenues areunchanged).

(c) The government temporarily raises spending for oneyear.

(d)Levels of education rise, leading to an increase in the futuremarginal product of capital.

Explanation / Answer

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