If a small open economy reduces defense spending, what happens to saving, investment, the trade balance,...

If a small open economy reduces defense spending, what happens to saving, investment, the trade balance, the world interest rate, and the exchange rate? Assume that initially saving exceeds investment. I want to see two sets of graphs illustrating the effects, Make sure you explain what is going on!

Expert Solution

As given in the question we first assume that initially savings exeeds investment.

The initial situation of the small open economy is illustrated in figure 1, the x axis represents the net exports(NX) and the y axis represents the real exchange rate(E). The savings(S₁ - I) and the net exports intersect at point A with exchange rate E₁ and the net exports NX₁ .

Now if the government reduces the defence spending, then the government savings increases which in turn increases the national savings. Since it is a open economy the investment rate depends on the world intrest rate and it is unchanged. As a result, the increase in the savings causes the (S₁ - I) line to shift towards right at (S₂ - I) as shown in the second figure. Hence, the real exchange rate falls from E₁ to E₂ and the trade balance rises from NX₁ to NX_2.

0

Rahul Sunny answered 2 years ago

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...

If the domestic government of a small open economy reduces government spending, the real exchange rate...

If the domestic government of a small open economy reduces government spending, the real exchange rate will __________ and net exports will ___________ a. Increase, decrease b. Increase, increase c. Decrease, increase d. decrease

Consider a small open economy in equilibrium with a zero current account balance. What happens to...

Consider a small open economy in equilibrium with a zero current account balance. What happens to national saving, investment, and the current account balance in equilibrium if a.future income rises? b.business taxes rise? c.government expenditures decline temporarily? d.the future marginal product of capital rises

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)...

Given the following information about a closed economy, what is the level of investment spending and national saving, and what is the budget balance?

Given the following information about a closed economy, what is the level of investment spending and national saving, and what is the budget balance? There are no government transfers.GDP: $1,000 million T=$50 millionC=$850 million G=$100 million

Consider a small open economy that has balanced trade. The economy enacts an investment tax credit....

Consider a small open economy that has balanced trade. The economy enacts an investment tax credit. As a result, national savings will ________ and the world interest rate will ___________. a) increase; rise b) decrease; rise c) increase; fall d) decrease; fall e) remain the same; remain the same

What is saving in open economy? Discuss what are differences of saving in closed and open...

What is saving in open economy? Discuss what are differences of saving in closed and open economy?

Write the equation for national saving for a small open economy. If national saving is held...

Write the equation for national saving for a small open economy. If national saving is held constant, what happens to domestic investment if NCO decreases? Why? Suppose the nominal exchange rate is 100 yen per dollar. Further, suppose the price of a baseball glove in Canada is $50 and the price of a baseball glove in Japan is 7500 yen. What is the real exchange rate between Japan and Canada in terms of baseball gloves? Is there a profit opportunity...

Trade Restrictions Suppose you are examining a small open economy with a large negative trade balance. Describe...

Trade Restrictions Suppose you are examining a small open economy with a large negative trade balance. Describe briefly the key pros and cons for this country if it decides to introduce a set of restrictions on international trade in order to achieve a situation when exports=imports. What might be the long-term implications of such restrictions? Feel free to make any reasonable assumptions or provide examples, if necessary!

The saving rate (gross domestic saving as a % of GDP) in Singapore, a small open economy, was 48% in 2017 while the investment rate (domestic investment as a % of GDP) was 25%.

Explain whether the given statement is true, false or uncertain. Start your answer by selecting one of the options – “True”, “False” or “Uncertain” and then provide arguments to justify your selection (be brief and concise and present your arguments in 100 or less words). You need to ensure your assumptions are clear, reasonable and explicit if making any.Question:The saving rate (gross domestic saving as a % of GDP) in Singapore, a small open economy, was 48% in 2017 while...

Question