In an open economy, an increase in saving might not cause an increase in domestic investment. Why not? Does that mean that an increase in saving is undesirable?
What will be an ideal response?
An increase in saving can affect the domestic real interest rate only by changing the world interest rate. If the world interest rate does not change, domestic investment is not affected. More saving means less consumption, which reduces both imports and domestic demand for domestic output, so exports (and net exports) rise. The increase in saving must correspond to investment somewhere, but not necessarily in the economy where the saving originates. Nonetheless, wealth rises for those who accomplish the higher saving.
You might also like to view...
Pirates have been intensely attacking ships off the shore of Somalia this year. Boat owners have reportedly coughed up more than $30 million in ransom and insurance premiums have shot up
The pirate activity and increase in premiums means that the expected wealth of boat owners who sail near Somalia is ________. A) decreasing B) increasing C) staying the same D) decreasing only if they have insurance
Use the LR curve to show what happens to output, the real interest rate, and the price level in the short run and in the long run if the government provides a tax credit to people who buy a new home, which leads to an increase in new housing
investment.