If a country has a current account deficit what does this imply about the closed economy...
If a country has a current account deficit what does this imply about the closed economy real interest rate relative to the world interest rate. Use a Meltzer diagram to illustrate.
Homework Answers
What it implies is that the real interest rate in the economy would be higher than the world interest rate. To illustrate, we will use the following Meltzer diagram
Diagram A
Diagram B
In Diagram A, the economy has no deficit. Savings is equal to income and the interest rate is at r. While the economy is closed, lets assume that this is equal to the real interest rate in the rest of the world.
Diagram 2 shows what happens when there is a current account deficit. In CAD, the investment is more than the savings, so the I curve moves to the right. This results in the real interest rate going up. The current account deficit is I-S.
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If a country has a current account deficit what does this imply
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