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1)Explain why, in a small open economy, (a) national saving does not have to equal investment, and (b) output does not have to equal absorption

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1)Explain why, in a small open economy, (a) national saving does not have to equal investment, and (b) output does not have to equal absorption.

2. Generally, what types of changes in desired saving and desired investment lead to large current account deficits in a small open economy? What factors lead to these changes in desired saving and desired investment?
3. In a world with two large open economies, what determines the world real interest rate? What relationship between the current accounts of the two countries is satisfied when the world real interest rate is at its equilibrium value?
4. How does an increase in desired national saving in a large open economy affect the world real interest rate? How does an increase in desired investment affect it? Why do changes in desired saving or investment in large open economies affect the world real interest rate but changes in desired saving or investment in small open economies do not?

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5. Under what circumstances will an increase in the government budget deficit affect the current account balance in a small open economy? In the cases in which the current account balance changes, by how much does it change?

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