The government of a small open economy announces a tax cut of $100 this year, combined with a tax increase of $110 next year, when the interest rate is 10%
What are the effects of this change on the world real interest rate, national saving, investment, and the current account balance in equilibrium when (a) Ricardian equivalence holds? (b) Ricardian equivalence does not hold?
(a) No effect on any of the variables.
(b) Real world interest rate unchanged, national saving declines (private saving rises, but not as much as government saving declines), investment is unchanged, and the current account balance declines.
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Motivation can be divided into two types:
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The chief economist of the country of Borduria has implemented a policy of maintaining the currency of Borduria at a low value compared to its trading partner. This will cause: a. the Bordurian exports to be cheaper for its trading partner
b. the Bordurian exports to become more expensive for its trading partner. c. the Bordurian interest rates to be higher than its trading partner. d. Borduria's imports from its trading partner to become less expensive.