Question

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?

Answer 1

(a) if future income rises, then national saving decreases, investment increases and the current account balance becomes negative.
(b) if business taxes rise, then national saving increases, investment decreases and the current account balance becomes positive.
(c) if government expenditures decline temporarily, then national saving increases, investment decreases and the current account balance becomes positive.
(d) if the future marginal product of capital rises, then national saving decreases, investment increases and the current account balance becomes negative.