Tutorial 2 2019.pdf - Tutorial 2 Q1 Chapter 5 Problem 7 Note Please read the section “Application Global Imbalance” in Chapter 5 before answering

Tutorial 2 2019.pdf - Tutorial 2 Q1 Chapter 5 Problem 7...

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1 Tutorial 2 Q1. Chapter 5, Problem 7 Note: Please read the section “ Application: Global Imbalance ” in Chapter 5 before answering this question. Q2. This question shows you the fundamentals that determine which countries run CA surplus and which run CA deficit. Imagine there are only two economies of comparable size in the world. Hence both are “large” countries, large enough to affect the world real interest rate by their saving and investment behavior. Assuming no government sector for simplicity, consumers and firms in these two economies make decisions on their private saving (S P ) and desired investment spending (I) in response to some factors, such as real interest rate, consumers’ preference between saving and current consumption, and marginal products of capital. Note: we measure macroeconomic variables in real term (as we usually do). Tables 1 and 2 show the desired private saving and desired investment at various levels of real interest rates, holding other factors constant. 1 Table 1
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