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Consider a large open economy that can borrow and lend with the rest of the world. For each question below make sure you draw the graphs and provide explanations.
a. Draw the saving and investment diagram for the home country assuming the home country is running a current account deficit. Explain how the world real interest rate is determined.
b. Suppose new products are developed in the home country that raises the profitability of domestic industries. Assuming that this raises the demand for capital, explain what will happen to the current account balance in the home country and in the foreign country. What happens to the real world interest rate?
c. Suppose the domestic economy goes into a deep recession and the investment demand falls dramatically. What happens to the current account balance in the home country and the foreign country? What will be the correlation of the trade balance and the unemployment rate?
d. Suppose the home country increases government spending without and lowers taxes. How will this impact the current account balance in the home country and the foreign? What happens to the world interest rate?
What does the size of the minimum efficiency scale of production imply about the following:
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illustrate what obligations do we have to society at large, including the world?" really make a difference in a company's competiveness.
The demand for boxes of nails is estimated to be Q = 100 – 5p + 2Y, where income is measured in thousands of dollars. If p = 4, and Y = 10, What is the income elasticity? ? If the equation is then re-estimated using just dollars instead of thousands ..
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