Re: ISI 2017 key

Posted by happy on Jun 08, 2017; 2:19am
URL: http://discussion-forum.276.s1.nabble.com/ISI-2017-key-tp7604137p7605103.html

Expansionary Fiscal Policy (IS Curve Shifted to the right) and Contractionary Monetary Policy (LM curve shifted to the left) => Net Effect interest rate increases => Investment decreases (I = I bar - bi)

Contractionary Fiscal Policy (IS Curve Shifted to the left) and Expansionary Monetary Policy (LM curve shifted to the right) => Net Effect interest rate decreases=> Investment increases (I = I bar - bi)

National Saving(NS) = Private Saving + Govt Saving
NS = (GDP + NFIA + TR + INT - T) + (T - TR -INT)

NS = I + NX + NFIA
NS = I + CA

d(NS) = d(I) + d(CA)   ------(1)

For CLOSED ECONOMY (CA = 0)
d(NS) = d(I) , so option c is correct

For OPEN ECONOMY
E(Nominal Exchange rate) and Interest Rate (i) are negatively related.

 i increased => E decreases => Exchange rate Appreciate => CA surplus decreases
 and
 i decreases => CA surplus increases (by the same logic)

-------------------------------------------------------------------------------------------------------------

Option (b) => interest rate increase => Investment and CA decreases => NS decreases
Option (c) => interest rate decreases =>Investment and CA increases => NS increases    
      (From equ. (1) and above logic)


So Option (c) is correct it increases National Saving (NS)