Consider a Small Open Economy That Is in Equilibrium with a Current

question 108

Essay

Consider a small open economy that is in equilibrium with a current account surplus.
(a)Draw a diagram showing this situation.
(b)Now suppose that future income increases.Show what happens in your diagram.What happens to the world real interest rate and the equilibrium quantities of saving,investment,and the current account balance?
(c)Repeat parts (a)and (b)for the case of a large open economy,showing a situation in which the home country initially has a current account surplus.Draw a diagram and describe how the rise in future income in the home country affects all four variables (the world real interest rate and the equilibrium quantities of saving,investment,and the current account balance)in both countries.

Understand the impact of disparities between expected and actual price levels on the economy.

Comprehend how inflation affects nominal and real wages.

Identify the types of unemployment present when an economy is at its potential output level.

Analyze the effect of wage and price level changes on the potential output.

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Definitions:

Positively Correlated

A relationship between two variables where they move in the same direction, meaning as one variable increases, so does the other, and vice versa.

Scatterplot

A type of graph in which the values of two variables are plotted along two axes, the pattern of the resulting points revealing any correlation present.

Normal Curve

A symmetrical, bell-shaped curve representing the distribution of a set of data where most occurrences fall near the average, and fewer are found the farther one moves away from the mean.

Standard Deviation

Standard deviation is a statistical measure that quantifies the amount of variation or dispersion of a set of data values from the mean (average) of the data set.