Answer to Question #258390 in Macroeconomics for shon

Question

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

a. An increase in the domestic willingness to save (which raises desired national saving at any given real interest rate).

b. An increase in the willingness of foreigners to save.

c. A temporary increase in foreign government purchases.

d. An increase in foreign taxes (consider both the case in which Ricardian equivalence holds and the case in which it doesn’t hold)

Answer 1

Solution:

a.). National saving will increase due to a desire by the population to save more. The investment will reduce since people will prefer to save more than invest. A high national saving relative to investment will lead to a surplus in the current account balance.

 

b.). National savings will decrease since the citizens will be saving less. The investment will increase due to savings from foreigners who will invest more in the country. An increase in foreigners’ savings will lead to a deficit in the current account balance.

 

c.). National savings will increase since the population will have enough income to save more. The investment will also increase due to additional disposable income. The current account balance will also increase.

 

d.). An increase in foreign taxes will lead to a reduction in national savings, a decrease in investment, and an increase in the current account balance due to a decline in imports.