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. Is this country borrowing from or lending to foreign countries?
What will be an ideal response?
Ans: The KI is 200>0, which means this country is borrowing from foreign countries.
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