Assume That in a Small Open Economy with Full Employment

question 13

Essay

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?

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Definitions:

Infantile Amnesia

The inability of adults to recall personal memories from early childhood, typically before the age of three or four.

Explicit Memories

Memories of specific facts and experiences that individuals can consciously know and declare.

Implicit Memories

Concerns memories that are unconsciously and automatically retrieved, influencing thoughts and behaviors without explicit awareness.

Spatial Memory

The ability to remember the location of objects, their arrangement in space, and navigate between locations.