9. Consider savings-investment diagrams assuming that there are two countries in the world, A and B. Initially, both countries are identical, i.e., they have the same supply of savings and demand for investment. Therefore, even as open economies, they both have balanced current accounts, i.e., neither has a deficit or surplus. Now assume that in country A, the government increases the budget deficit, shifting the supply of savings to the left. If all other curves (A s investment demand, B s savings supply, B s investment demand) stay the same, what will the effect of the increase in A's budget deficit?
9. Consider savings-investment diagrams assuming that there are two countries in the world, A and B. Initially, both countries are identical, i.e., they have the same supply of savings and demand for investment. Therefore, even as open economies, they both have balanced current accounts, i.e., neither has a deficit or surplus. Now assume that in country A, the government increases the budget deficit, shifting the supply of savings to the left. If all other curves (A s investment demand, B s savings supply, B s investment demand) stay the same, what will the effect of the increase in A's budget deficit?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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![9. Consider savings-investment diagrams assuming that there are two
countries in the world, A and B. Initially, both countries are identical, i.e.,
they have the same supply of savings and demand for investment.
Therefore, even as open economies, they both have balanced current
accounts, i.e., neither has a deficit or surplus. Now assume that in country
A, the government increases the budget deficit, shifting the supply of
savings to the left. If all other curves (A s investment demand, B s savings
supply, B s investment demand) stay the same, what will the effect of the
increase in A's budget deficit?
a. Country B will have a CA surplus.
b. Country A will have a KFA deficit.
c. Investment in country B will increase.
d. The world real interest rate will fall.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F5e53533f-1454-405b-ade8-7b1d405fa07e%2Fed943db4-a56c-4c05-bdd5-6ea3756831d0%2Ft8kod8h_processed.jpeg&w=3840&q=75)
Transcribed Image Text:9. Consider savings-investment diagrams assuming that there are two
countries in the world, A and B. Initially, both countries are identical, i.e.,
they have the same supply of savings and demand for investment.
Therefore, even as open economies, they both have balanced current
accounts, i.e., neither has a deficit or surplus. Now assume that in country
A, the government increases the budget deficit, shifting the supply of
savings to the left. If all other curves (A s investment demand, B s savings
supply, B s investment demand) stay the same, what will the effect of the
increase in A's budget deficit?
a. Country B will have a CA surplus.
b. Country A will have a KFA deficit.
c. Investment in country B will increase.
d. The world real interest rate will fall.
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