Q#1

Explain Balance of payment and explain relationship between

a)current account and capital account

b)current account and net export

Q#2 How would each of the following affect national saving, investment, the current account balance, and the real interest rate in a large open economy?

a. An increase in the domestic willingness to save (which raises desired national saving at any given real interest rate).

b. An increase in the willingness of foreigners to save.

c. A temporary increase in government purchases.

d. An increase in taxes (consider both the case in which Ricardian equivalence holds and the case in which it doesn't hold).

Q#3 In a small open economy, desired national saving S = $10 billion + ($100 billion)r^w

desired investment, I = $15 billion - ($100 billion)r^w

output Y = $50 billion,

government purchases, G = $10 billion,

world real interest rate, r^w= 0.03.

Find the economy's national saving, investment, current account surplus, net exports, desired consumption, and absorption?

Q#4 consider the world with only two countries, which are designated the home country (H) and the foreign country (F). Output equals its full employment level in each country. you are given the following information about each of the countries:

Home Country

Consumption: C_H = 100 + 0.5Y_H - 500r^w

Investment: I_H = 300 - 500r ^w

Government Purchases: G_H = 155

Full employment Output: Y_H = 1000

Foreign Country

Consumption: C_F = 225 + 0.7Y_F - 600r^w

Investment: I_F = 250 - 200r ^w

Government Purchases: G_F = 190

Full employment Output: Y_F = 1200

a. Write national saving in the home country and in the foreign country as functions of the world real interest rater^w.

b. What is the equilibrium value of the world real interest rate?

c. what are the equilibrium values of consumption, national saving, investment, the current account balance, and absorption in each country?