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?
What will be an ideal response?
| (a) | No effect on any of the variables. |
| (b) | Real world interest rate unchanged, national saving declines (private saving rises, but not as |
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