Suppose That the World Consists of Only Two Countries, a and B

question 8

Essay

Suppose that the world consists of only two countries, A and B, of relatively equal sizes. The world interest rate in such a model is some average of the autarkic (no trade) interest rates in each of the two countries.
a. Draw "parallel" loanable funds markets for the two countries and show the position of the world interest rate. (Hint: What relationship must exist between the NCOs of the two countries?)
b. Suppose country A enacts laws that induce people to save more. Show the effects of such laws on each country's domestic amounts saved and invested.
c. In the currency-exchange diagrams for both countries, show the effect of country A's savings policies on both countries' exchange rates and net exports.

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Definitions:

Chi-square Test

A statistical test used to determine if a significant relationship exists between two categorical variables.

Significance Level

The threshold or probability of rejecting the null hypothesis when it is actually true, commonly denoted by alpha (α).

Sample Data

A subset of data collected from a larger population, used in statistical analysis as a representation of that larger population.

Hypotheses

Assumptions or propositions that are tested for statistical significance through experiments or observations.