(a)
Determine the values of national saving, capital inflows, domestic investment, and the real interest rate.
(a)
Explanation of Solution
Since the savings is the sum total of national savings and the capital inflow, the saving–investment equality can be represented as follows:
Rearrange the equation to get the value of the real interest rate (r) as follows:
Thus, the real interest rate is 0.05 or 5%.
Substitute the value of ‘r’ in the given functional form of domestic supply of saving:
Thus, the domestic saving is 1,600.
Substitute the value of ‘r’ in the given functional form of investment:
Thus, the investment is 1,800.
Substitute the value of ‘r’ in the given functional form of capital inflow:
Thus, the capital inflow is 200.
(b)
Determine the values of national saving, capital inflows, domestic investment, and the real interest rate.
(b)
Explanation of Solution
If the desired national savings declined by 120, then the new functional form of domestic savings can be represented as follows:
Since the savings is the sum total of national savings and the capital inflow, the new saving–investment equality can be represented as follows:
Rearrange the equation to get the value of the real interest rate (r):
Thus, the real interest rate is 0.06 or 6%. This means that the real interest rate increases from 5% to 6%
Substitute the value of ‘r’ in the new functional form of domestic supply of saving:
Thus, the domestic saving is 1,500. This means that the domestic savings decrease from 1,600 to 1,500.
Substitute the value of ‘r’ in the given functional form of investment:
Thus, the investment is 1,760. Therefore, the investments decrease from 1,800 to 1,760.
Substitute the value of ‘r’ in the given functional form of capital inflow:
Thus, the capital inflow is 260. This means that the capital inflow increased from 200 to 260. Here, the increase in capital inflow will be offset by the decline in domestic savings.
(c)
Determine the values of national saving, capital inflows, domestic investment, and the real interest rate.
(c)
Explanation of Solution
Since the savings is the sum total of national savings and the capital inflow, the new saving–investment equality after the fall in capital inflow can be represented as follows:
Rearrange the equation to get the value of the real interest rate (r):
Thus, the real interest rate is 0.10 or 10%. That means that the real interest rate increases from 5% to 10%
Substitute the value of ‘r’ in the given functional form of domestic supply of saving:
Thus, the domestic saving is 1,700. This means that the domestic savings increase from 1,600 to 1,700.
Substitute the value of ‘r’ in the given functional form of investment:
Thus, the investment is 1,600. Therefore, the investments decrease from 1,800 to 1,600.
Substitute the value of ‘r’ in the given functional form of capital inflow:
Thus, the capital inflow is -100. This means that the capital inflow decreases from 200 to -100. Here, the decrease in the capital inflow will be offset by the increase in domestic savings.
Want to see more full solutions like this?
Chapter 11 Solutions
PRINCIPLES OF MACROECONOMICS(LOOSELEAF)
- Because of the relationship between net capital outflow and net exports, the level of net capital outflow at the equilibrium real interest rate implies that the economy is experiencing (Balanced trade/ a trade deficit/ a trade surplus) Now, suppose the government is experiencing a budget deficit. This means that ( National saving will increase/ national saving will decrease/ Domestic investment will increase / domestic investment will decrease) which leads to ( an increase in the supply of / a decrease in the supply of / an increase in the demand for/ a decrease in the demand for) loanable funds. After the budget deficit occurs, suppose the new equilibrium real interest rate is 6%. The following graph shows the demand curve in the foreign-currency exchange market. Use the green line (triangle symbol) to show the supply curve in this market before the budget deficit. Then use the purple line (diamond symbol) to show the supply curve after the budget deficit. Summarize the…arrow_forwardUrgently need. Y = C + I + G + NX Y=$6000 G=$1000 T=$1150 C=$200+0.75(Y−T) I=1100−50r NX=913−913ε r=r*=7r=r*=7 b. Suppose now that G rises to $1400. Solve for private saving, public saving, national saving, investment, the trade balance, and the equilibrium exchange rate.arrow_forwardWhat is the saving and investment equation? If national saving declines what will happen to domestic investment and net foreign investment?arrow_forward
- A country's domestic supply of saving, domestic demand for saving for purposes of capital formation, and supply of net capital inflows are given by the following equations: S= 1,800 + 2,000r /= 2,000 - 4,000r KI= -100+ 6,000r Instructions: Enter real interest as percent values rounded to one decimal place. If you are entering any negative numbers, be sure to include a (-) in front of those numbers. a. Assuming that the market for saving and investment is in equilibrium, find the current values for national saving, capital inflows, domestic investment, and the real interest rate. Real interest: National Savings: Capital inflows: Investment: % b. Assuming that desired national saving declines by 120 at each value of the real interest rate. Determine the effects of this reduction in domestic saving on the following values: Real interest: % National Savings: Capital inflows: Investment: c. Assume instead that concerns about the economy's macroeconomic policies cause capital inflows to fall…arrow_forwardInteractions Among the Markets for Goods and Services, Financial Capital, and Foreign Exchange: SR vs LR (i) What assumptions does the Keynesian model make to ensure that in the short run, saving (S) minus investment (1) must equal net exports (NX) in an open economy? Explain.arrow_forwardSaving-Investment Diagram Real Interest Rate, r(percent Saving Curve Investment Curve DE F GH Desired Saving and Investment (in billions of dollars) Based on the Saving-Investment Diagram, if the world real interest rate is indicated by C, then the difference between values H and D measures the net capital outflow the difference between values H and F measures the trade deficit the difference between values H and D measures the trade deficit the domestic real interest rate is indicated by B none of the abovearrow_forward
- Consider an economy with the given equations. Y = C + I + G + NX Y=$6000 G=$1050 T=$1100 C=$250+0.65(Y−T) I=1000−45r NX=1285−1285? r=r*=6 b. Suppose now that G rises to $1350. Solve for private saving, public saving, national saving, investment, the trade balance, and the equilibrium exchange rate.arrow_forwardA country recently had $800 billion worth of domestic investment and its residents purchased $400 billion worth of foreign assets. If foreigners purchased $100 billion of this country’s assets, what was this country’s saving? Explain how you found your answer.arrow_forwardHolding national savings constant, does an increase in net capital outflow increase, decrease, or have no effect on a country’s accumulation of domestic capital?arrow_forward
- An open economy with absolute mobility of capital is described as follows: consumption function is given as C = 50 +0, 8(Y - T), where Y is output, and T is net taxes, Investment function is given as I = 20-10i, where I is nominal interest rate. Government spending G 22-4E+0, 3Y where E - nominal exchange rate (price of foreign currency in terms of domestic currency). For one unit of foreign currency, you can get 3 units of domestic currency. The real money supply is M* /P= 50. The demand for real money is described by the following function: L(Y,i) = 0, 5Y-10i. 20, tax Tr = 10, export Ex = 6E +10, import Im %3D Find BP curve, if the economy is initially in the internal and external equilibrium. Write an equation for BP without spaces and % signsarrow_forwardDraw a diagram for Saving and Investment in a small open economy.Assume the world real interest rate is above the closed equilibrium interestrate for the country you drew. Is this country a foreign lender or foreignborrower? Explain with the intuition of the saving and investment functionsarrow_forwardWhy are net exports and net capital outflow always equal? Derive the relation between savings,domestic investment, and net capital outflow using the national income accounting identity.arrow_forward
- Principles of Macroeconomics (MindTap Course List)EconomicsISBN:9781285165912Author:N. Gregory MankiwPublisher:Cengage LearningBrief Principles of Macroeconomics (MindTap Cours...EconomicsISBN:9781337091985Author:N. Gregory MankiwPublisher:Cengage Learning
- Principles of Macroeconomics (MindTap Course List)EconomicsISBN:9781305971509Author:N. Gregory MankiwPublisher:Cengage Learning