Consider the small open economy of Albania that is currently running a trade deficit a world real interest rate of rw. Answer the following questions using a graphical representation of planned saving and investment model in the small open economy. Graphically discuss the effects of the following events on the domestic saving, investment, and the country's trade balance. Treat each case separately. Saving (S)
Consider the small open economy of Albania that is currently running a trade deficit a world real interest rate of rw. Answer the following questions using a graphical representation of planned saving and investment model in the small open economy. Graphically discuss the effects of the following events on the domestic saving, investment, and the country's trade balance. Treat each case separately. Saving (S)
Principles of Economics 2e
2nd Edition
ISBN:9781947172364
Author:Steven A. Greenlaw; David Shapiro
Publisher:Steven A. Greenlaw; David Shapiro
Chapter23: The International Trade And Capital Flows
Section: Chapter Questions
Problem 21SCQ: Explain briefly whether each of the following would be more likely to lead to a higher level of...
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![Consider the small open economy of Albania that is currently running a trade deficit at
world real interest rate of rw. Answer the following questions using a graphical
representation of planned saving and investment model in the small open economy.
Graphically discuss the effects of the following events on the domestic saving,
investment, and the country's trade balance. Treat each case separately.
rw
r
Saving (S)
Investment (1)
S and I
Given the assumption that Albania is a small open economy and currently
running a trade deficit, the world interest rate is lower than the real interest rate
that would have prevailed if Albania were a closed economy.
This is shown on S-I diagram.
a. The government of Albania, as a condition to join the EU in the future, has to
reduce its government budget deficit by reducing government spending.
b. Increased optimism about the future economic activity in Albania results in
increase in private domestic investment.
c. In response to new policies, domestic consumption spending increases.
(Treat each case separately by carefully labelling each diagram by showing the direction
of shifts)](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fd0f30ebe-ccd3-4602-b95e-b2939d8e492f%2F654bbb69-8896-4065-b76b-cdd1aac81352%2Fv7oqsv9_processed.png&w=3840&q=75)
Transcribed Image Text:Consider the small open economy of Albania that is currently running a trade deficit at
world real interest rate of rw. Answer the following questions using a graphical
representation of planned saving and investment model in the small open economy.
Graphically discuss the effects of the following events on the domestic saving,
investment, and the country's trade balance. Treat each case separately.
rw
r
Saving (S)
Investment (1)
S and I
Given the assumption that Albania is a small open economy and currently
running a trade deficit, the world interest rate is lower than the real interest rate
that would have prevailed if Albania were a closed economy.
This is shown on S-I diagram.
a. The government of Albania, as a condition to join the EU in the future, has to
reduce its government budget deficit by reducing government spending.
b. Increased optimism about the future economic activity in Albania results in
increase in private domestic investment.
c. In response to new policies, domestic consumption spending increases.
(Treat each case separately by carefully labelling each diagram by showing the direction
of shifts)
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