11. Assume that the world works according to the Classical model. In a small open economy, output is...

11. 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 saving, Public saving, and National saving; ii. the amount of net capital outflows for this country; iii. the trade balance of this country. Show your work.

Expert Solution

Consumption = 40 + 0.6*(900 – 90) = 526

i) Private saving = Y – T – C = 900 – 90 – 526 = 284

Public saving = T – G = 90 – 150 = -60

National Saving = Private saving + Public saving = 224

Investment = 280 – 10*4 = 240

ii) Net capital outflows = S – I = 224 – 240 = -16

iii) Trade balance = Y – C – I – G = 900 – 526 – 150 – 240 = -16

Rahul Sunny answered 2 years ago

Classical small open economy model: According to the Classical small open economy model, what happens to...

Classical small open economy model: According to the Classical small open economy model, what happens to domestic national saving, investment, the trade balance, and the real exchange rate in response to each of the following events? Draw a loanable funds market diagram and a net exports diagram to illustrate your answer in each case. (For these diagrams, let’s assume that the country starts out running a current account surplus and capital account deficit, as in the examples in class.) a)...

According to the Classical small open economy model, what happens to domestic national saving, investment, the...

According to the Classical small open economy model, what happens to domestic national saving, investment, the trade balance, and the real exchange rate in response to each of the following events? Draw a loanable funds market diagram and a net exports diagram to illustrate your answer in each case. (For these diagrams, let’s assume that the country starts out running a current account surplus and capital account deficit, as in the examples in class.) (a) The introduction of a stylish...

a) “According to the long-run classical model, there will be a decrease in the world interest...

a) “According to the long-run classical model, there will be a decrease in the world interest rate and the world level of investment when the aging populations of industrial countries start running down their savings and, at the same time, the investment appetite of emerging economies begins to slow down.” True/False, explain with the aid of one diagram for the world market for loanable funds. (10 points) Note: The world as a whole is a closed economy. b) A new...

Consider savings and investment in a small, open economy model. Suppose the exogenous world interest rate...

Consider savings and investment in a small, open economy model. Suppose the exogenous world interest rate determines the investment. a) Draw the demand and the supply of loanable funds. What determines the net exports, NX (or net capital outflow) in this open economy? b) Show the impact of a fiscal policy change at home (an increase in G or a decrease in taxes) on savings, investment and net export (NX) with the help of a graph in this model. c)...

Imagine a small open economy with perfectly flexible wages and prices(i.e. classical economy always at full...

Imagine a small open economy with perfectly flexible wages and prices(i.e. classical economy always at full employment) and perfect capital mobility. Say government expenditure, private consumption and taxes are constant but investment demand fluctuates wildy. Do Investment and the real exchange rate co-vary positively or (when one high the other is also high) negatively (one high the other is low)? explain in detail

Consider a classical model of large-open economy described by the following equations: Y = C +...

Consider a classical model of large-open economy described by the following equations: Y = C + I + G + NX Y = 8,000 G = 2,500 T = 2,000 C = 500 + 2/3 (Y − T) I = 1,000 − 50r CF = 500 − 50r NX = 1,000 − 250ε where Y is output, C is consumption, I is investment, G is government purchases, NX is net exports, T is taxes, r is the real interest rate,...

Consider the DD-AA small open economy model a. Assume imperfect asset substitutability. The interest parity condition...

Consider the DD-AA small open economy model a. Assume imperfect asset substitutability. The interest parity condition now equalizes the domestic return to the foreign return plus the expected dollar depreciation and a risk premium. Suppose there is a permanent rise in domestic government spending, what is the impact of this on output?

The country of Leverett is a small open economy. Suddenly, a change in world fashions makes...

The country of Leverett is a small open economy. Suddenly, a change in world fashions makes the exports of Leverett unpopular. a. What happens in Leverett to saving, investment, net exports, the interest rate, and the exchange rate? b. The citizens of Leverett like to travel abroad. How will this change in the exchange rate affect them? c. The fiscal policymakers of Leverett want to adjust taxes to maintain the exchange rate at its previous level. What should they do?...

Q3. The country of Zambia is a small open economy. Suddenly, a change in world fashions...

Q3. The country of Zambia is a small open economy. Suddenly, a change in world fashions makes the exports of Zambia unpopular. a. What happens in Zambia to saving, investment, net exports, the interest rate, and the exchange rate and exchange rate? b. The citizens of Zambia like to travel abroad. How will this change in the exchange rate affect them? c. The fiscal policymakers of Zambia want to adjust taxes to maintain the exchange rate at its previous level....

Suppose the world price of bicycles is below the domestic price in a small open economy....

Suppose the world price of bicycles is below the domestic price in a small open economy. d. (3) Define and give an example of consumption dead weight loss e. (3) Define and give an example of production dead weight loss. 2. (4) Give two reason why a nation might have import product standards? 3. (4) What is mercantilism? Is trade a zero-sum game?

Question