Economics Notes: Small and Open Economies, Growth, Aggregate Supply and Demand
In the long run, the higher saving rate leads to a higher level of productivty and income, but not to higher growth in these variables.
Catch-up effect : Countries that start off poor tend to grow more rapidly than countries that start off rich
Y=C+I+G S=I S=(Y-T-C) + (T-G) = private saving – public saving.
Because a high interest rate makes borrowing more expensive, the quantity of loanable funds demanded falls as the interest rate rises.
The supply and demand for loanable funds depend on the real interest rate and not nominal.
Increase in saving = shift the supply of loanable funds to the right = reduces the interest rate. (graphique page 181)
Increase in investment = demand for …show more content…
Fisher-effect : the one for one adjustment of the nominal interest rate to the inflation rate.
Arbitrary redistrubitions of wealth : Hyperinflation enriches sam at the expense of the bank because it diminishes the real value of the debt.
Open-economy baic concepts : page 281
Current account = Net exports + Net inflow of dividends and interest payments
S = I + NCO
Real exchange rate = (Nominal exchange rate x Domestic price)/ foreign price = (e x P)/P*
Canada’s real interest should be equal to world interest.
Small-open economy : page 305
Same as in closed economy except Interest rate = world interest rate. Creastes net capital outflow. Investissements domestiques crée la demande for loanable funds. National saving is the supply for loanable funds. S = I + NCO
Net capital outflow determines the supply of CAD offered for sale in the market for foreign currency exchange. The demand for CAD is determined by canada’s net exports.
Increase in world interest rate : Increase in saving and decrease in investment = increase in supply, decrease in demand = NCO increases. Nco increases= money supply increases = real exchange rate depreciate = CAD depreciate = Exports rise.
Government deficit = reduces national saving = reduces NCO. NCO reduced = money supply reduced = exchange rate goes up. CAD appreciates = fall in net exports
Net export = source of demand of CAD. More export =