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Suppose a large open economy with perfect capital mobility has a real interest rate that equates national saving and desired investment that is above the world real interest rate. Now suppose that the country undertakes a significant fiscal contraction, reducing govt. purchases by $100 billion and increasing tax revenues by $100 billion through a higher effective corporate tax rate. Show the effects of this fiscal contraction on real interest rate, desired saving, desired investment, and the net export balance.

Macroeconomics, Economics

  • Category:- Macroeconomics
  • Reference No.:- M9390447
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