Question

2. (20 points) In each of the following scenarios, determine the effects on the equilibrium (1) interest rate, (2) savings, (3) investment, and (4) net export for the closed economy, small open economy and large open economy settings. a. A country gets involved in a small war which increases the government spending. b. A country experienced a natural disaster that destroys a significant fraction of capital. c. An oil-exporting contry experiences an increase in the oil price which increases future business profits (no effect on households). d. The government increases the corporate tax rate. e. The government increases the personal tax rate and Ricardian equivalence holds.

Answer 1

Page No. Date Q) Fon a small economy, S enon's roleh largi economy, it can influence intoret nate - For a + X-M) - C + I + 6 aty - her M all women, (nt y = a + cy - Ibrt & G + X - my ( assume to i - br 5 + 2 + x 1-cum 11-C+ since bra unsill economy can't change Rol i. Aro for closed conomy op igm occurs at intersection of LM & IS Cuone y = c + cl + I br + Goo. Mpky-her M/p k l c tot IbatG) -hr. Mo-c) = K c & I - kbr +G -(1-c) hr l-kb-(1-ch) di ot1=0 dG Kb+ (1-0). DELTA Notebook

Page No. Date Olao olhos, moniasis entures as es increasis (1-ctm) + kb. sanings of au because 3 types of income (Y) economies increases increases as les ↑ Investment in (1) Small conany wo change as there is no a chance in income (2) open iconomy I lange) will have a crowed out office due es large change large change in in 'n so I might fall (3) closed economy Investment will reduce due to increase in r as there willl also be a meet crowd cut office - - - o 6 Nel en In - nost closed open y mill Import sconomy, x=0 M O : ALX-M =0 small cromy, M will increase an. increase ACX-M) 2D as X* is tired DELTA Notebook

Page No. Date ② large economy since y increases to imports mill increase but at the same time y also inorans due to increase in r of lange cionong xa and Ma n So ambronous arct an (x-M) since traction of canlal distrend, we can - loke a foul in autonomous decrease in vinalment lie Ico) - IS curre sufle lift for useid and larze worm t For a small at wonomy uuuuuUULUU DELTA Notebook

Page No. Date - er Rate of intimist, - closed economy s opin small nanong 2 awan large wonen falls ldhagram ni lays the same en falle (diagram) - ussid, onomy s axn unoul conomy due to halls as y also falls silays constant Ayo talls due to by <o - sos conomy s in ine - emaine lange & closed economy I falls but at some time or also halls 1, I-ber ambiguous effect on Investment small conany I = I - but AI AI <o o urestment halls in - 4 Nel caports, in losed a small economy, a (X-M)=0 in large economy 8yco - AM<0 . but at the same time y also fally ther imports fowe - hence, X also falls enly when enpost from that country, i ambiguous effect on Neu imports as they DELTA Notebook

Page No. Date - (a) w corporat tari rais restiw I s usrsonalis tous lince investment you so we wir lake all the effects andhausboot bi $29955575555PPE DELTA Notebook

i solved part a,b and d.there was no mention as to how to solve i.e whether to show it through a diagram or through intuition or mathematically. so i tried to solve part a through all the 3 approaches, however i did part b and d through intuition.