Question

Suppose that US saving drops as the US emerges from a recession and that the US is a small, open economy. A. Use the open economy model and a graph to show what this will do to US net exports B. Now suppose that saving worldwide shrinks. Use the model and a graph to show what happens to US net exports.

Answer 1

When the saving rate decline in the economy, the inflow of capital will cause the appreciation of currency and net export declines.

on other hand when world saving falls, thus there is rise in the world interest rate , so there will be a outflow of fund which would be accompanied by the depreciation of currency and net export will rise.