Question

Consider a large open economy in equilibrium between home saving and home investment. What are the effects on the world real interest rate, domestic national saving, domestic investment, the domestic current account balance, foreign national saving, foreign investment, and the foreign current account balance in each of the following scenarios? Justify your answer with economic intuition and/or graphical analysis;

**What not to anwer with: stating what happens to each variable is not sufficient to earn credit for this question.

(1) current income rises in a large foreign open economy.

(2) the future marginal product of capital rises in the domestic country.

(3) a decrease in the tax on returns on investment in a large foreign open economy.

Answer 1

Answer 1- If current income rises in large open economy this would increase the foreign savings as savings increases this would cause a futher investment in the economy and increases the foreign account balance

Answer 2- if the marginal product of capital rises in the domestic country it increases the demand of the product which increases the domestic income of the trader as the income increases domestic savings also increases which cause increases in domestic investment and increases the domestic current account balance this not only increase the demand in domestic but also in the international market as well ..

Answer 3- if there is a decrease on tax return in investment on foreign open economy this would increase the profits in foreign which would cause a further investment in the economy and increases the foreign current balance