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In: Economics

In a small open economy, Sd = 1,000 + 10,000r Id= 2,000 – 10,000r where Sd...

  1. In a small open economy,
    • Sd = 1,000 + 10,000r
    • Id= 2,000 – 10,000r where Sd is the desired saving, Id is the desired investment, and r is the real interest rate (in decimal form). If the world interest rate is rw = 5% (i.e., 0.05 in decimal form), what is the current account balance CA? Give the number.

Solutions

Expert Solution

Saving - Investment relation in open economy.

Sd = Id + CA

1000 + 10000r = 2000 - 10000r + CA

CA = 1000 + 10000r - 2000 + 10000r

CA = -1000 + 20000r

At equilibrium r = rw = 5% = 0.05

CA = -1000 + 20000 (0.05)

CA = -1000 + 1000

CA = 0

Current Account (CA) balance is 0

Rahul Sunny answered 2 years ago
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