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Suppose a new technology is developed that increases investment demand in both a closed economy and in a small open economy that is in other ways identical. Holding other factors constant, will the quantity of investment spending increase more in the closed economy or in the small open economy? Explain. Assume prices are flexible and that factors of production are fully employed in both economies. Assume there is perfect capital mobility for the small open economy.

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Divya Singh
Divya SinghLv10
28 Sep 2019

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Related questions

5. Suppose the U.S. Congress passes a budget which increases individual income

taxes by $120 billion and increases infrastructure spending (airports, roads,

bridges, etc.) by $50 billion. The increase in income taxes is concentrated at the top,

so the tax increase causes personal consumption expenditures to fall by only $30

billion. Use this information to answer the questions below. (20 pts)

a. At constant interest rates (“other things equal”), what would these policy

changes do to national saving and domestic investment spending?

Change in S =

Change in I =

b. Closed economy analysis: Assuming the U.S. financial system is closed to

international financial flows, draw an S/I diagram to illustrate the effect of

these policy changes on (1) U.S. interest rates and (2) the quantity of domestic

investment spending. Incorporate your numerical answers from part (a) into

your diagram.

c. Open economy analysis: Now assume that the U.S. financial system is open

and that the U.S. is small enough in the global financial system that you can

ignore the effect of these policy changes on global interest rates. Draw an S/I

diagram to illustrate the effect of the policy changes on (1) U.S. net capital

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Suppose that both wheat and corn have an income elasticity of 0.2.

a. If the average income in the economy increases by 4 percent each year, by what percentage does the quantity demanded of wheat increase each year, holding all other factors constant? Holding all other factors constant, if 14 billion bushels are demanded this year, how many bushels will the quantity demanded increase next year if incomes rise by 4 percent? ________ million bushels

b. Given that average personal income doubles in the United States about every 30 years, by about what percentage does the quantity demanded of corn increase every 30 years, holding all other factors constant? _______%

Suppose that both wheat and corn have an income elasticity of 0.1.

a. If the average income in the economy increases by 7.00 percent each year, by what percentage does the quantity demanded of wheat increase each year, holding all other factors constant?

Instructions: Round your answer to one decimal place.

%

Holding all other factors constant, if 20 billion bushels are demanded this year, by how many bushels will the quantity demanded increase next year if incomes rise by 7.00 percent? million bushels

b. Given that average personal income doubles in the United States about every 30 years, by about what percentage does the quantity demanded of corn increase every 30 years, holding all other factors constant? %

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