Question

Assume that in small open economy where full employement always prevails national saving is 300. If domestic investiment is I =400-20r

a, what is real interest rate be if the economy is closed

b, if the economy is open and the world interest rate is 10 percent what will investiment?

Answer 1

a. if the economy is closed, then the real interest rate is:

I = S,

400 - 20r = 300,

r = 5%.

b. If the economy is open and the world interest rate is 10 percent, then investment will be lower than saving and will increase from abroad.