Will the potential change in domestic saving in japan

Assignment Help Macroeconomics

Reference no: EM133439394

Problem: On March 11 2011, a massive earthquake and tsunami struck off the Japanese coast that also smashed a nuclear power plant. The earthquake and tsunami destroyed a significant portion of Japan's capital stock, which was estimated to be a damage of around $300 billion.

Assume that Japan is a large open economy in the international funds market and that the shock is temporary and current.

a) Explain the effects of the reduction in the capital stock on current employment, current output, and current national saving. Will the national saving curve expand, contract, or remain unaffected?

b) Will the potential change in domestic saving in Japan that affects the supply of funds decrease, increase, or not change the international real interest rate, rw?

c) Holding the desired amount of future capital constant, ¯Kt+1, what is the effect of the reduction of the existing capital stock, Kt, on current investment, It? In your explanation refer to the equation that describes the accumulation of capital over time.

d) Will the change in domestic investment in Japan that affects the demand for funds decrease, increase, or not affect the international real interest rate, rw?

e) On the basis of your answers to part a) and c), illustrate the effects of the natural disaster on a global saving-investment graph assuming that Japan is a large open economy and had a current account surplus before the shock. Include the effects of the natural disaster on the
international funds market as a closed economy illustration, rw -S, I-diagram.

f) What are the overall effects on Japanese output, consumption, investment, current account, and net exports?

Reference no: EM133439394

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