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The United States, a large open economy has substantially increased government spending and decreased taxes during

the early 1980s. Not only has that changed national saving in the United States, but also in the rest of the world. (a) What was the consequence for the world real interest rate? (b) What was the consequence of the US policy on Norway, a small open economy? Use a model of a long-run small open economy with perfect capital mobility to discuss what happened to domestic saving, investment and interest rates in Norway.

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