ECON 222 Lecture Notes - Lecture 15: Real Interest Rate, Capital Account, Autarky

• School: Queen's University
• Department: Economics
• Course: ECON 222
• Professor: Kennedy

Document Summary

National saving (s) has two uses: to increase the nation"s stock of capital by funding investment, to increase the nation"s stock of net foreign assets by lending to foreigners. Saving and investment in a small open economy (soe) Soe that borrows abroad: because id sd, we have foreign borrowing =4bn. Id increases, sd, increases: consumption decreases, absorption decreases, nx (=y- absorption) increases, desired foreign lending increases. Temporary adverse (negative) supply shock: y decreases, saving decreases, saving curve shifts from s1 to. S2: foreign lending decreases as a result of a negative shock, went from ab to ac, before shock: net foreign lending = b-a (sd. 1 id: after shock: nfl= c a (sd. Increase in expected mpkf: benefit of investment increases. I shifts to the right: net foreign lending=b-c (after shock) It decreases (ca surplus decreases: before shock: nfl= b - a.