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Open economies, interest rates, investment and savings. Your essay should cover the following two issues.
Issue 1: How the “classical small open economy macroeconomic model” explains the impact of an increase in world interest rates on the domestic economy? Use carefully labeled diagrams and equations to illustrate your analysis.
Issue 2: Elaborate on the following: a) Does world saving equal investment? (You should acknowledge in your essay if there are small statistical discrepancies). Offer some intuition for your answer.
b) Which regions/countries from the table show a negative net lending? How are these regions/countries able to finance their investment? Offer some intuition for your answer. Tip for issue 2: From the website of the International Monetary Fund (www.imf.org), retrieve the most recent World Economic Outlook (WEO). In the statistical appendix, find the table titled ‘Summary of Sources and Uses of
World Saving’, which list savings and investment (as percentage of GDP) around the world. Use the data for the most recent year available to answer a) and b).
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