Question

In this problem, you are asked to draw graphs. Please use a straight edge and draw them as neatly as possible. Imagine the world relative to a small open economy. Draw three graphs in order to illustrate the initial conditions in the problem. The first graph represents the world’s loanable funds market. Illustrate the initial supply of loanable funds (Saving), initial demand for loanable funds (investment), and the initial equilibrium world interest rate (r*). Properly label the axes. Remember that the entire world is a closed economy. The second graph represents the small open economy’s loanable funds market (similar to Figure 6-2 in your textbook). Properly label the axes. Assume that initially r* < r. What does this assumption imply about net capital outflow and the trade balance in the small open economy? Explain your answer. Properly illustrate the implication on your graph. The third graph represents the small open economy’s exchange rate market (similar to Figure 6-8 in your textbook.) Properly label the axes and annotate an initial equilibrium real exchange rate.

Now we will shock our markets. Assume that the rest of the world inexplicably experiences an increase in investment demand, but the small open economy does not. What happens to the world real interest rate and to saving, investment, the trade balance, and the exchange rate in the small open economy? Please reproduce your first three graphs and illustrate the impact in each of the three graphs. Make sure you also explain precisely why particular variables are changing.

Answer #1

Hi

The answer of the following question is given below as follows :

Now ans. B as follows.

Note : Now the net capital outflow will rise because of the fact that now investors are selling and buying the assests.

I hope I have served the purpose well.

Thanks.

a. [5 marks] Draw 2 diagrams (1 of loanable funds market and the
other of foreign exchange market) for a small open economy where
the world real interest rate is higher than domestic real interest
rate . Draw the initial equilibrium in both markets and label them
completely.
b. [5 marks] On the same set of diagrams, show the effect of a
decrease in national saving in both markets. Clearly show the new
equilibrium in both markets with all the...

Assume that Indonesia is a small open economy. Explain how a
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Support your answer with a graph of the rest of the world
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Firms in a small open economy unexpectedly increase their demand
for investment. What is the impact on the trade balance, the
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Figure 6-8 in your textbook to illustrate the effects. Make sure
you explain what is going on.

2. Graph B: Utilize a market model to draw the demand and supply
for loanable fund in equilibrium. Label the demand curve D1 and the
supply curve S1. Label the initial interest rate as r1 and quantity
of loanable funds as Q1. Shift the correct curve to demonstrate
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Be sure to label the new equilibrium interest rate and quantity of
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Consider the following competetive economy
K=150 L=150 Production Function= Y=K^.4L^.6 Consumption Function
. C=10+.7Yd I= 40-100R, G=30, T=30 .... MPL= .6K^.4L^-.4 MPK= .4K
^-.6L^.6
Suppose the government increased spending to G = 32 (holding
taxes constant T=30).
Compute the new value for government saving (Sg) and national
savings (S), and use the investment function to calculate the new
interest rate (r).
Graphically illustrate the impact of increase in government
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(Please...

Assume that the world works according to the Classical model. In a
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function is I=280-10r. You
know that the output produced is Y=900, government spending is
G=150, taxes are
T=90 and that the world
real interest rate is 4% (r*=4).
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all the questions below, make sure to explain your answers and show
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a.
Compute: i. Private...

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on the Home economy and people worry that the negative impacts
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The supply of capital (KS) increases
...

Consider the following competetive economy
K=150 L=150 Production Function= Y=K^.4L^.6 Consumption Function
. C=10+.7Yd I= 40-100R, G=30, T=30 .... MPL= .6K^.4L^-.4 MPK= .4K
^-.6L^.6
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