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:

Moral Thinking

The process of reasoning about what, morally, one ought to do, often involving considerations of rights, obligations, benefits to society, fairness, or virtue.

Empirical Research

A way of gaining knowledge by means of direct observation or experience, utilizing scientific methods.

Neuronal Myelination

The process by which myelin sheaths are formed around the axons of nerve cells, enhancing the speed and efficiency of electrical signal transmission in the nervous system.

Frontal Lobe

The area at the front of each cerebral hemisphere; includes tissue crucial for many aspects of planning and controlling thoughts and behavior.