Question one: What happens when current k increases in closed economy?
In the circular nature of ubiquitous flow of goods and services, via the money market in a closed system, household consumption activities are at the heart of activities. Even when government plays a role in public goods, taxes, and borrowing one simple model of a closed system reflects the domestic economy as consisting of “the product market and money market” (“Macroeconomics Policies in an Open Economy,” 2017). This is illustrated below in ‘The Circular Flow’ [Note: Reprinted from the aforementioned source, 3.A General Model of the Closed Economy]. However, since the real interest rate in a closed economy would steadily balance the goods market, in terms of maintenance of an equilibrium, let “k” represent one of the factor inputs. In this case, when current ‘k’ increases in a closed economy, assuming it is on the supply side of the goods-market model, when ‘k’ increases the labor function as an output is consistent with diminishing margin returns as the following formula suggests, courtesy of Google Scholar demonstrates (“The Closed Economy,” 2017).
However, in the Solow Model of a closed economy, there is no trade, no taxation, in which case ‘k’ remains an input factor, in the form of capital output. The closed economy expression of, Y = C + I + G, firms use end-goods and services.
Question two: What happens when g increases in open economy?
Where ‘g’is government spending in the macroeconomic open economy, in discussion the equation in terms of the open economy is represented by: Y = C + I + G (X – M). In this case, since an open economy involves imports and exports in the equation, the outcome of ‘g’ increasing depends upon the balance of trade. If imports exceed exports, even if government spending on public goods and services increases in an open economy, the GDP tends to be lower than the situation of domestic spending. Should exports exceed imports, and ‘g’ increases – all parts of the equation being equal – then, there is no trade deficit and GDP is greater than overall spending.
Question three: What happens for the lender and borrower when r increases? Show the sub effect and income effect for both. [Graph and explanation needed]. If ‘r’ increases for the borrower, their first-phase of consumption exceeds initial assets in that growth period of income, in income effect. The sub effect for the borrower makes them beholden to price changes. The lender’s sub effect is likely to be the same as borrower, but the income effect will most likely be the opposite from the borrower. {Reprinted graph courtesy of Drexel, 2017}.
(“Two-Period Consumer Model,” 2017, p. 17). The sub effect impacts the price change of goods, in terms of quantity demands. The income effect appends to purchasing power when changes in real income occur.
References
Drexel. (2017). Two-Period Consumer Model [Data file]. Retrieved from http://www.pages.drexel.edu/~jpd48/2periodconsumer%20model%20handout.pdf
Google Scholar. (2017). The Closed Economy [Data file]. Retrieved from https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=4&cad=rja&uact=8&ved=0ahUKEwiG0-bqh7HRAhUG0GMKHeQwARMQFggtMAM&url=https%3A%2F%2Fwww.economicsnetwork.ac.uk%2Fslides%2FMacro2_Closed_Economy.ppt&usg=AFQjCNG16TBBb9FyPlEdFJ4Vy5l56HZjyg&sig2=RhCFcVwORvDUvJ577BpFHg&bvm=bv.142059868,d.cGc
Iowa State University Department of Economics. (2017). Macroeconomics Policies in an Open Economy [Data file]. Retrieved from http://www2.econ.iastate.edu/classes/econ355/choi/mac.htm
