Suppose the president of country A opens this economy to trade with the rest of the world in 2010. Furthermore, suppose that the investment demand is the same as in 2009. Now, instead of being provided the equilibrium level of SP, we are provided with the SP curve: r =0.025+0.000025Q, where r is still the real interest rate. We are also told that the capital inflow equals $200 billion in 2010. For this part of the problem assumed that the government has a balanced budget in the year 2010. What is the change in the level of investment spending between 2009 and 2010?
What will be an ideal response?
Answer:
r*=0.035 in 2010, and r*=0.02 in 2009.I-curve is: r=0.05-0.000025Q
therefore, I*=600 in 2010, and I*=1200. There is a decrease in I of 600 billion.
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