2B Answers to Homework (1).doc

C the effects on a large open economy are just a

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S unchanged but I up, so CA falls as much as I rises (so that now there is a CA deficit!). (c) The effects on a large open economy are just a hybrid of the closed and small open: S would rise (S up in closed, S unchanged in small open, hybrid of these = S up, but not as much as in open) I would rise (I rises in both closed and small open, hybrid of this….) CA falls (CA unchanged in closed, but falls in small open, mixture of these….) R rises (r rises in closed, unchanged in small open, ergo r rise but not as much as in closed). The larger the country, the more the hybrid approximates the closed. The smaller the economy, the more the hybrid tends to the small open example. 2.11(a) See Figure 2.3 in handout. (b) 2.12 (a) Same as Figure 2.3 again (since CA deficit = KFA surplus) (b) Same as Figure 2.4 2.13. Country A is bigger than B. (We know this because .... ) 2.14 (b) I would remain unchaged. CA would increase 2.15 Y + NFI - T 2.16 Assuming you have an (S-I) line for the large open economy and an (I-S) line for the ROW. They should intersect at a positive value (to the right of the zero line). The decreased savings by foreign countries should shift the ROW's (I-S) line to the right causing the world interest rate to rise and the large open economy's CA to increase. The CA for the ROW falls (it's KFA is increasing). 2.17. See Figure 2.6 in Handout 2.. The large open economy's KFA increases. The world interest rate rises.
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  • Fall '14
  • Deerfield
  • Empty set, Open set, Closed set

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