A Small Open Economy

A Small Open Economy - interest rate. A Large Open Economy...

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A Small Open Economy A closed economy neither borrows from nor lends to foreign countries. Foreigners may want to lend funds for investment in the U.S. if the expected returns are higher than in other countries. If investment opportunities outside the U.S. are more promising, savings will go outside of the U.S. When capital is mobile internationally, we have an open economy. A country's desired total saving is equal to the sum of desired domestic investment and the amount of savings lent abroad. A small open economy is one whose total saving is too small to affect the world real interest rate. For large and small open economies, the domestic real interest rate must equal the world real
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Unformatted text preview: interest rate. A Large Open Economy A large open economy can affect the world real interest rate. The world real interest rate equates desired international lending by the U.S., for example, with desired international borrowing by the rest of the world. Equilibrium occurs when the amount the U.S. wants to lend abroad is equal to the amount foreigners wish to borrow from us. A rise in investment in the U.S. raises the world real interest rate; an increase in saving in the U.S. lowers the world real interest rate....
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A Small Open Economy - interest rate. A Large Open Economy...

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