The national accounting of country M is reported as follows: Y (GDP) = 100 (in b
ID: 1095812 • Letter: T
Question
The national accounting of country M is reported as follows:
Y (GDP) = 100 (in billions)
C (consumption) = 80
I (domestic investment) = 20
G (government purchase) = 25
T (net taxes) = 10
FA (private capital flow) = +15 (credit)
a) How large is the private saving, public saving, and national saving, respectively?
b) How large is the net foreign investment? Is country M a lender or borrower?
c) If country M adopts a fixed exchange rate system, what kind of exchange pressure does its monetary authority face?
d) What
Explanation / Answer
Y = C+I+G+X-M
NX = net exports = X-M
NX = -25
So country is importing more than exports.
1.
Private saving = Y-C-T =10
Public Saving = T-G = -15
National saving = -5
2.
S-I = NX = -25
Net foreign investment = NX = 25
3.
Since country is importing more than export, so in fixed rate exchange regime its domestic currency will start depreciating.
4.
To keep the exchange rate at par central bank have to increase the supply of foriegn currency in domestic market. this will increase the supply of foreign currency as a result domestic currency will not depreciate due to higher demand.