Question

The country of Leverett is a small open economy. Use the information provided below to answer the following questions about national saving (S), domestic investment (I), net exports (NX), the domestic interest rate (r), and the exchange rate (ε).
a. What happens to saving, investment, net exports, the interest rate, and the exchange rate?b. The citizens of Leverett like to travel abroad. How will this change in the exchange rate affect them?

Answer 1

Answer:

Explanation:

When Leverett's exports became less popular, its savings, Y-C-G does not change. Reason being that, it is assumed that Y depends on the amount of capital and labour, consumption depends only on disposable income and government spending is a fixed extrinsic variable.

Since investment depends on interest rate, and Leverett is a small open economy that takes the interest rate as given, thus investment also does not change . Neither does net export change (This is shown by the S-I curve in the attachment).

The decreased popularity of Leverett's exports leads to an inward shift of the net export curve inward. At the new equilibrium,net exports remains unchanged, though the currency has depreciated.

Leverett's trade balance remained the same, despite the fact that its exports are less popular, this is due to the fact that  the depreciated currency provides a stimulus to net exports which overcomes the unpopularity of its exports by making them cheaper.

b. Leverett's currency now buys less foreign currency, thus traveling abroad  becomes more expensive. This is an instance showing that imports (including foreign travel) have become more expensive- as required to keep net exports unchanged in the case of decreased demand for exports.  

Answer 2

Answer:please refer to the explanation section

Explanation:

The question is incomplete, we are not given the information to use in examining what will happen to saving, investments, net export the interest rate and exchange rate. we will explain the effects of each of these variables on the national income.

National income = consumption + investments + net exports + government spending

Savings

Savings have a negative impact on Gross domestic product or national income. an Increase in savings means less consumption spending. A Consumption spending in turn decreases gross domestic product/national income.

Interest rates

interest rates affects investment increases the opportunity cost of purchasing capital which will then make investor choose to invest funds with financial institutions rather than investing in capital assets. domestic investments will decrease when interest rate increase which will lead to a decrease in Gross domestic product/national income.

Exchange rate

exchange rate will appreciate when interest rates increase. when interest rate increases foreign investor will want to invest in leverette's financial institutions which will lead to an increase in demand for leverrete's currency. an increase in demand decrease the level of exchange rate which is an appreciation of leverrete's currency.

b. When citizens of leverett travel abroad, they will demand foreign currency which will increase increase their for foreign currency. an increase in demand foreign currency will increase the level of exchange rate which is a Depreciation of Leverret's currency against foreign current. When citizens travel Abroad more often the exchange rate will increase (domestic currency will depreciate)