Chapter 5, Saving and Investment in Open Economy
- In large open economies
o Large open economy is large enough to affect world real rate of interest.
- Home vs Foreign Economy
d d w
In summary, any shift in either S or I lines at home or the foreign economy will impact r
Fiscal Policy and the Current Account
Question: Are government budget deficits necessarily accompanied by current account deficits? Are
there twin deficits?
S = Y – C – G
- An increase in the government budget deficit raises the CA deficit only if the increase in budget