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?

Step by Step Solution

3.45 Rating (158 Votes )

There are 3 Steps involved in it

1 Expert Approved Answer
Step: 1 Unlock

In Fig 54 suppose initially both countries have a zero current account A rise in the government bud... View full answer

blur-text-image
Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock
Step: 3 Unlock

Document Format (1 attachment)

Word file Icon

797-B-E-M-E (7790).docx

120 KBs Word File

Students Have Also Explored These Related Economics Questions!