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Questions › IIT JAM › IIT JAM 2021 › Q46
1 markInternational Economics › Open-economy macroeconomics › Internal and external balance, twin deficitsModerateabout 2 min

IIT JAM 2021 Question 46: Open-economy macroeconomics

In a small open economy, desired domestic savings Sd=10+100rwS^d = 10 + 100 r^wSd=10+100rw and desired domestic investment Id=15−100rwI^d = 15 - 100 r^wId=15−100rw, where rwr^wrw is the world real interest rate. If rw=3%r^w = 3\%rw=3%, the equilibrium current account balance is _______ (in integer).

Answer and worked solution

Answer: 1

In a small open economy the current account equals desired saving minus desired investment at the world interest rate.

At rw=0.03r^w = 0.03rw=0.03, Sd=10+3=13S^d = 10 + 3 = 13Sd=10+3=13 and Id=15−3=12I^d = 15 - 3 = 12Id=15−3=12, so the current account is 13−12=113 - 12 = 113−12=1. The answer is 111.

Plain-text version

In a small open economy, desired domestic savings S^d = 10 + 100 r^w and desired domestic investment I^d = 15 - 100 r^w, where r^w is the world real interest rate. If r^w = 3%, the equilibrium current account balance is _ (in integer).

Open-economy macroeconomics has come up 55 times in 7 exams since 2006.

What this question tests

This question is on Internal and external balance, twin deficits, part of Open-economy macroeconomics in International Economics.

Reaching full employment and external balance together, and the link between budget and trade deficits.

TestStop has 5 past-paper questions on this subtopic; the nearest in year are below.

  • GATE 2021 · Q17For an open economy, the 'twin deficits' can be expressed by: [where S = Savings; I = Gross Private…
Take this paper as a timed mockMore on Internal and external balance, twin deficits

Question from the IIT JAM 2021 paper. Solutions are TestStop's own. Not affiliated with or endorsed by any examination authority.