(exercise)
CHAPTER 5 The Open Economy
18
1. Fiscal policy at home
r
An increase in G
or decrease in T
reduces saving.
r 1*
Results:
I 0
N X S0
S2 S1 NX2
NX1
r
I > 0,
S = 0,
r*
S
NX2
net capital
outflow and NX fall by the
amount I
NX1
I (r )2
I (r )1
I1
I2
S, I
The nominal exchange rate
e = nominal exchange rate, the relative price of domestic currency in terms of foreign currency (e.g. Yen per Dollar)
I1
I (r )
S, I
CHAPTER 5 The Open Economy
19
NX and the federal budget deficit
(% of GDP), 1965-2009
8%
Budget deficit
2%
6%
(left scale)
4%
0%
2% -2%
0%
-2%
Net exports
9
Saving, investment, and the trade balance
(percent of GDP) 1960-2019