Question

Each question must be accompanied by a graph, labeled properly. Each answer (up, down, no change) should be accompanied by a one line explanation.

For a closed economy, predict the effect of an increase in G on the following variables:

1. a) Real interest rate

2. b) Desired Saving

3. c) Desired Investment

2.

For a small open economy where the world interest rate is above the rate that would prevail if it were closed (equilibrium) predict the effect of an increase in G on the following variables:

1. a) Real Interest rate

2. b) Desired Saving

3. c) Desired Investment

4. d) NX

5. e) Does the country start out with a trade deficit or surplus? (before any shift)

3. For a closed economy, predict the effect of an increase the marginal product of capital on the following variables:

1. a) Real interest rate

2. b) Desired Saving

3. c) Desired Investment

4. For a small open economy where the world interest rate is below the rate that would prevail if it were closed (equilibrium) predict the effect of an increase in G on the following variables:

1. a) Real Interest rate

2. b) Desired Saving

3. c) Desired Investment

4. d) NX

5. e) Does the country start out with a trade deficit or surplus? (before any shift)

Answer 1

Answer 1: