Consider a Large Open Economy That Has a Positive Current

question 42

Essay

Consider a large open economy that has a positive current account balance.
(a)Suppose the domestic government increases the tax rate on firm revenues.Draw a diagram to explain the effects on the world real interest rate,saving in each country,investment in each country,and the current account balance in each country in equilibrium.Explain your work.
(b)In addition to the tax increase in part (a),suppose now that the foreign government increases lump-sum taxes on individuals.Draw a new diagram to incorporate the overall effects of both tax changes and explain the effects (from the initial equilibrium with neither tax change)on the world real interest rate,saving in each country,investment in each country,and the current account balance in both countries.Explain your work.

---

Definitions:

Unconscious

Refers to the part of the mind that influences thoughts, feelings, and behaviors without one's awareness.

Freud

Sigmund Freud was an Austrian neurologist and the founder of psychoanalysis, a clinical method for treating psychopathology through dialogue between a patient and a psychoanalyst.

Personality Inventories

Psychological assessment tools designed to evaluate a wide range of personality traits.

Projective Tests

A type of personality test in which the individual responds to ambiguous stimuli, revealing hidden emotions and internal conflicts.