Consider a case of small open economy. In this economy, there is an IT revolution, and as a result the productivity of the economy has gone up. What will be the e§ect of this productivity increase on interest rate and net export in this economy? Use the model to explain you answer.
(a) What will be the long-run impact of an increase in budget defcit in a closed and in a small open economy?
(b) What will be the long-run impact of an increase in budget defcit in a large open economy like the U.S.?
(c) Explain the impact of an exogenous increase in world savings on large economy's investment, interest rate, exchange rate, and trade defcit?
(d) Do you agree with the "Savings Glut" hypotheses that argue that the low interest rate in the U.S. between 2000-2007 was caused by excess savings in the developing countries?