Small Open Economy a What makes a country small? the scale of the economy is so small that it cannot affect the world interest rate >Price taker ---take world real interest rate
11 Small Open Economy ◼ What makes a country “small”? --- the scale of the economy is so small that it cannot affect the world interest rate →Price taker --- take world real interest rate
Small Open Economy ■ a Interest rate no longer equilibrates savings and investment a domestic foreign bonds are perfect substitutes a Capital is perfectly mobile
12 Small Open Economy ◼ r = r* ◼ Interest rate no longer equilibrates savings and investment ◼ Domestic & foreign bonds are perfect substitutes ◼ Capital is perfectly mobile