Assume that in a small open economy with full employment, consumption depends only on disposable income. National saving is 300, investment is given by I = 400 - 20r, where r is the real interest rate in percent, and the world interest rate is 10 percent.

a. If government spending rises by 100 , does investment change? What is the level of investment after the change?
b. Does the trade balance change if $G$ rises by 100 ? If it changes, does it increase or decrease, and by how much?
c. Does net capital outflow change if $G$ rises by 100 ? If it changes, does it increase or decrease, and by how much?
d. Will the real exchange rate rise, fall, or remain constant as a result of the change in $G$ ?

Question

Assume that in a small open economy with full employment, consumption depends only on disposable income. National saving is 300, investment is given by I = 400 - 20r, where r is the real interest rate in percent, and the world interest rate is 10 percent.

a. If government spending rises by 100 , does investment change? What is the level of investment after the change?
b. Does the trade balance change if $G$ rises by 100 ? If it changes, does it increase or decrease, and by how much?
c. Does net capital outflow change if $G$ rises by 100 ? If it changes, does it increase or decrease, and by how much?
d. Will the real exchange rate rise, fall, or remain constant as a result of the change in $G$ ?

Quizplus · Accepted Answer

The Answer of Assume that in a small open economy with full employment, consumption depends only on disposable income. National saving is 300, investment is given by I = 400 - 20r, where r is the real interest rate in percent, and the world interest rate is 10 percent.

a. If government spending rises by 100 , does investment change? What is the level of investment after the change?
b. Does the trade balance change if $G$ rises by 100 ? If it changes, does it increase or decrease, and by how much?
c. Does net capital outflow change if $G$ rises by 100 ? If it changes, does it increase or decrease, and by how much?
d. Will the real exchange rate rise, fall, or remain constant as a result of the change in $G$ ?

Assume That in a Small Open Economy with Full Employment GGG

Assume That in a Small Open Economy with Full Employment $G$