Saving, Investment, and the Current Account

Saving, Investment, and the Current Account - Econ 1110,...

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Unformatted text preview: Econ 1110, Spring 2008, Professor Ted 1 Lecture #9 Saving, Investment, and the Current Account Econ 1110, Spring 2008, Professor Ted 2 B A D Small Open Economy • Real Interest Rate Fixed at r = r w • NX = CA = S d – I d (assume NFP = NUT = 0, so NX = CA ) • Temporary Adverse Productivity Shock S 1 I S , I r r w S 2 • Saving falls • Investment unchanged • CA falls Econ 1110, Spring 2008, Professor Ted 3 Goods Market Equilibrium in a Small Open Economy Given: Y = 20 and G = 4 Consumption and Investment as Functions of r World Real Interest Rate, r w 0.02 0.04 0.06 Desired Consumption, C d 15 13 11 Desired Investment, I d 5 3 1 Results Desired Absorption, C d + I d + G Net Exports, NX = Y – Desired Absorption Desired National Saving, S d = Y – C d – G Desired Foreign Lending, S d – I d Note : We are assuming that NFP = 0 and NUT = 0. 24-4 1-4 20 3 16 4 5 4 Econ 1110, Spring 2008, Professor Ted 4 B E D A Example: Oil Discovery • Increase in MPK f and in Future Output S , I r r w S 1 I 1 I 2 S 2 • Investment increases • Saving falls • CA falls Econ 1110, Spring 2008, Professor Ted...
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This note was uploaded on 04/15/2008 for the course ECON 1110 taught by Professor Tedloch-temzelides during the Spring '08 term at Pittsburgh.

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Saving, Investment, and the Current Account - Econ 1110,...

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