06+Saving+and+Investment%2C+Part+2

06+Saving+and+Investment%2C+Part+2 - Agenda Saving and...

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1 6-1 Saving and Investment in Closed and Open Economies, Part 2 6-2 Agenda Saving and Investment in Closed Economies Saving and Investment in Open Economies 1. Small Open Economies 2. Large Open Economies 6-3 S and I in a Closed Economy Assumptions: 1. A closed economy. There are no imports or exports, i.e., M = X = 0. 2. Prices are fully flexible. Makes this a long run analysis. 3. All markets are in equilibrium. There is perfect competition. 6-4 S and I in a Closed Economy National income identity is now: Y = C + I + G or I = Y – C – G National saving is: S=Y–C–G Goods market equilibrium is now: S = I
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2 6-5 S and I in a Closed Economy S, I r 6-6 S and I in a Closed Economy How does a closed economy respond to: 1. Changes in autonomous consumption? 2. Changes in taxes? 3. Changes in government purchases? 6-7 S and I in a Closed Economy S, I r S I r 0 S 0 =I 0 6-8 S and I in a Closed Economy An increase in desired saving will: 1. Reduce that country’s real interest rate, and 2. Increase that country’s desired investment.
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3 6-9 S and I in a Closed Economy How does a closed economy respond to: 1. Changes in autonomous investment? 6-10 S and I in a Closed Economy S, I r S I r 0 S 0 =I 0 6-11 S and I in a Closed Economy An increase in desired investment will: 1. Increase that country’s real interest rate, and 2. Increase that country’s desired saving. 6-12 Key Diagram #5: A Closed Economy S, I r S I r 0 S 0 =I 0
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4 6-13 Key Diagram #5: A Closed Economy Factors that shift the saving function: 1. Changes in autonomous consumption.
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This note was uploaded on 10/18/2011 for the course ECON 100B taught by Professor Wood during the Fall '08 term at University of California, Berkeley.

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06+Saving+and+Investment%2C+Part+2 - Agenda Saving and...

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