Question

How would each of the following affect national saving, investment, the current account balance, and the real interest rate in a small open economy?

1. An increase in the domestic willingness to save
2. An increase in foreign government purchases

Answer 1

An increase in domestic willingness to save increases the national savins, thereby investement reduce current account balance and decrease the real interest rate in the economy.

An increase in foreign spending will decrease the national savings, decrease the current account balance and does not affect the real interest rate in a small open economy.