The paper "Introduction to Microeconomics" is a great example of an assignment on macro and microeconomics. Domestic savings for a particular country gets determined by a variety of factors, including demographic characteristics, time preferences, and income distribution. The current account is the difference between domestic savings and investments. An increase in the local economies, therefore, will result in a surplus in the current account. Where, CD, ID, and GD indicate expenditure on domestic production only — that is, excluding expenditure on imports. On the other hand, foreign economies with more investment opportunities for entrepreneurs can afford to have low levels of domestic savings, and deficit on the current account is common. Effect on investment. Unlike in a closed open Economy, the savings need not an equal investment.
There is a relatively minimal relationship between domestic savings and the level of investment in an open economy with capital mobility. However, if the domestic saving is increased by reducing the national deficit through raising income taxes, disposable personal and business income is reduced. Potential investments, therefore, are deflected elsewhere. This would result have an offsetting effect on the rise in savings by the public.
Moreover, if the rate of taxation of corporation increases, retained profits would decline substantially thus reducing the level of dividends available. The actual rate of interest would arise if the level of investments in enhanced. It is because more investments reduce capital distribution to other sectors thus affecting the supply of money in those sectors. Economists such as Feldstein and Horioka have previously studied the relationship and came up with an empirical estimation relationship below; Effect on interest rates. A small open economy is an economy smaller enough such that the actions of the economy do not influence the global rate of interest.
A large open economy on the other hand influences the world interest rate directly through its fiscal policies. An increase in domestic saving therefore would lead to a decline in interest rates, thus stimulating investment. It, therefore, means that investors would always equal saving. Some Economists (for instance, Keynes) argue prevailing rates of interest do not have an effect on the levels of both investments and national savings.
news.com.au. (2015, July 30). Treasurer Joe Hockey to reveal Budget 2014 deficits set to double. Retrieved from http://www.news.com.au/finance/economy/treasurer-joe-hockey-to-reveal-budget-2014-deficits-set-to-double/story-fn84fgcm-1227156037138
Treasury. (2015, July 30). Australia's Response To The Global Financial Crisis: A SPEECH TO THE AUSTRALIA ISRAEL LEADERSHIP FORUM. Retrieved from http://www.treasury.gov.au/~/media/Treasury/Publications_and_Media/Speeches/2009/Australias_response_to_the_global_financial_crisis/Downloads/PDF/Australia_Israel_Leadership_Forum.ashx
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