Assume That in a Small Open Economy with Full Employment $G$

question 66

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:

Price

The expected price in currency, required, or given for a good or service.

Utility Function

A utility function is a mathematical representation of how different goods or bundles of goods satisfy a consumer's needs and preferences.

Cow Feed

A type of feed specifically formulated for the dietary needs of cows, often including grains, hay, and other nutritional components.

Hay

Dried grass, often used as fodder for livestock.