Question: Section 5.5 showed that for a small open economy, an increase in the government budget deficit raises the current account deficit only if it affects
Section 5.5 showed that for a small open economy, an increase in the government budget deficit raises the current account deficit only if it affects desired national saving in the home country. Show that this result is true also for a large open economy. Then assume that an increase in the government budget deficit does affect desired national saving in the home country. What effects will the increased budget deficit have on the foreign country's current account, investment in both countries, and the world real interest rate?
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