section6 - ECON 101B: Section 6 Handout Date: 2/4/11...

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ECON 101B: Section 6 Handout Date: 2/4/11 Question 1 How would each of the following affect national saving, investment, net export, and the real interest rate in a small open economy? 1. An increase in the domestic willingness to save. 2. An increase in the expected returns on investments at home. 3. Political unrest that increases uncertainty. 4. An increase in the willingness of foreigners to save. 5. An increase in domestic government purchases. 6. An increase in foreign government purchases. 7. An increase in foreign taxes. Question 2 In a small open economy, output is $25 billion and government purchases are $6 billion. Consumption and investment are related to the world interest rate in the following manner: World Real Interest Rate Consumption Investment Savings Net Exports 5% $12 bln $3 bln 4% $13 bln $4 bln 3% $14 bln $5 bln 2% $15 bln $6 bln 1. For each value of the world real interest rate, find national savings and net exports. 2. What is the relationship between the world interest rate and national savings? Why?
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section6 - ECON 101B: Section 6 Handout Date: 2/4/11...

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