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Suppose that Americans decide to increase their saving.a. If the elasticity of U.S. net capital outflow with respect to the real interest rate is very high, willthis increase in private saving have a large or small effect on U.S. domestic investment?b. If the elasticity of U.S. exports with respect to the real exchange rate is very low, will this increase inprivate saving have a large or small effect on the U.S. real exchange rate?

a) When Country A citizens decides to increase their savings, it pushes down the real interest rate. since there is an inverse relation between real interest rate and net capital outflow and the elasticity of Country U net capital outflow is high with respect to the real interest rate, so the Country U net capital outflow will increase to a great extent. Now, because domestic investment will be less for a rising net capital outflow, the Country $U$ net capital outflow will have a negligible impact on Country U domestic investment.

b) The impact of increased private savings is that it reduces the real interest rate; as such net capital outflow will increase. A high net capital outflow will increases the supply of dollars in the foreign-currency exchange market, which in turn reduces the real exchange rate. Now, if the Country U exports have low elasticity with respect to real exchange rate, then a large fall in the Country U real exchange rate is required to increase the Country U net exports so that it is equal to the increased net capital outflow at the equilibrium.

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Chapter 32

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The Data of Macroeconomics

The Real Economy in the Long Run

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Okay, Question Ni I'm supposed that Americans decide to increase their saving. So the first step of this question is we know that saving increase. So this, um Why Shoes to the right. So we know that this question We must have a decrease in the real interest rate. Okay, let's continue to insert some questions, eh? If the illustrious if the elasticity off us nada Cabra outflow with respect to the real interest rate is very high where this increasing private saving have a large or small effect on us domestic investment. So to ensure this question, we have to know the concept off elasticity. So elasticity in this question is how much a change off the Rio interest rate is going to affect the change in net capital outflow. So the small train go here in the front. He close to, um the change that is that, uh, gri gri letter Delta? I think so. We know that in this question, we have a large elasticity, So this is a large number. So that means that the denominator can be rare small, while the numerator can be a large number. That is why this whole term right here is large. Okay, so let's continue to analyze this situation. We know that the real interest Rico's down, right? So we must have this new, equally liberal like like accordingly, like in the bottom, right off this original equilibrium, the original blue dot Here. So the new local group equilibrium is the red dot over here, and another condition we know is that this ratio is huge. So a small change gained. Ah, in the really extreme injury said, a small change in the Y axis is going to have a huge effect on the X axis. Stroll this more dramatically. So actually, disc Herb, it's like like um, this is the researcher. So this black curve here is actually berry flat. That is how we week had can have this high elasticity. So if I redraw this, grab it, it's like something like this, right? With the blue dart being, uh the old, equally grim and the wreck Doc being the new equilibrium. So a small change in the Rio exchange rate is going to have a huge impact on the net Capital Alfa. So that is how we have this high elasticity in this question. But we know that things there is a huge changing that cargo outflow. Comparatively, our domestic investment is not going to change that much. So two instruments in a, uh this change in saving domestic saving is not going to have a huge impact on the domestic investment. So if we carry our logic of question eight because you'd be we can easily answered question, be the question being using that If the English Thursday off U S exports would respect really extreme Great. So now we're looking at the bottom, right? Grab here. So if the elasticity is very low now, we have been like a new small definition off this elasticity. So in this graph that you estes ity isjust how much change off the Rio exchange rate so realized I also have an easier here. So it was a this e. And, uh, this e here is let's write like capital E for elasticity is like, How much change of the Rio, uh, exchange every day is going to affect your You're, um, trade balance. So your net export. So we know that this number is very small, according to the question. So it means that we can have a huge say a huge denominator while very small numerator. So every so we if we also want to re troll this graph to make it more, um, more suitable to our equation right here we can make this. So we make this black curve steeper. So if I read rolled this craft, as is like a steeper lying so like a reasonable here, this is very steep. Right? So a small change off exchange rate reasonable here is just going to make this net export change a layer. But that is how we come up with this small elasticity. Always go back. Go back to that and analysis. We know that now interest rate goes down, right, so interest rate goes down. So in this net, capital outflow is going to increase. Right, So increase. So we have this new camera awful. So distant knew Kevin out. Bullshit. Still right. Ah, is a consequence off there off a decrease in interest free. So we know that in this foreign currency market, the new equally grim this right here. Sorry, I should use this blue dot Here is the total equilibrium and the red dot here, as the new, equally grim so we know that extra 100 iss going down. But is the net exports say the trade deficit is also going to change a lot? Eso for discussion. The answer is no. It is going to have badges The small effect Because we know that this this curve is like the restate due to this slow elasticity. So we we will not spare. Expect Leary. Hi Rice in the net. Expert s so in conclusion, to answer a decision, we have to first be familiar off the relation between these three. Grab here. And second, we have to know the concept off unless elasticity which is like, how much of the price change is going to affect the quantity. So this is probably like the most difficult question off this chapter.

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