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Savings and Investment: Current Events in an Open Economy

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In light of recent events, in an open economy like the US, assuming a zero current account balance. What happens to investment, real interest rates, current account balance and national saving of the US economy with the following events?
a. The US Congress and Mr. Obama introduce a "buy only American" policy in its legislation, which has the effect of driving up the cost of capital equipment
b. A technological breakthrough increases the quality and speed of mainframe computers a capital equipment used in many industries thereby increasing the future earnings in those industries
c. A decision by the US to use fiscal policy to run a fiscal deficit, mainly through unprecedented heavy spending, to stimulate the US economy

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Savings and Investment: Current Events in an Open Economy

Introduction

Several events have occurred recently that had an effect on the savings and investment of the economy of the US. The US is an open economy and many events and changes in the policies have brought about an impact on the interest rates, savings, investment and current account balance. In this paper, three such events have been discussed and their effect on these four key indicators of the economy has also been shown.

"Buy only American" Policy

The event of introducing a "buy only American" policy by the US Congress and Mr. Obama, the companies in the US would have an effect of increasing the cost of capital equipment. With the increase in the cost of capital equipment, more funds will be required to purchase or acquire the capital equipment. Thus, the cost of borrowing funds would also increase. Thus, with the increase in the demand of the funds, the real interest rates would also increase.

The legislation will either subsidize companies in the US to build that equipment, or the companies will set up the same equipment in US for more cost and ...

Solution Summary

Current Events in an Open Economy are articulated.
The response addresses the queries posted in 714 Words, APA References

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In addition to the balance of payments data presented above, the Bureau of Economic Analysis' document entitled, International Investment Position of the United States (http://www.bea.gov/bea/newsrel/intinvnewsrelease.htm) offers the following information.
"At year-end 2002, the value of foreign investments in the United States exceeded the value of U.S. investments abroad by $2,387.2 billion (preliminary) with direct investment valued at current cost. At year-end 2001, foreign investments in the United States exceeded U.S. investments abroad by $1,979.9 billion (revised)."

Write a 2-3 page article on the United States's current account deficit. The reporter will edit your material down to a usable length but asked for plenty of material with which to start. She requests that you answer the following questions:

1. What has caused the U.S. run a merchandise trade deficit year after year since the early 1980s?
2. Is the current account a deficit problem? Explain.
3. Is the trend of the international investment position of the U.S. problematic? Why or why not?
4. How is the current account related to a country's business cycle?
5. What is the relationship between a country's net financial inflow and its current account?
How does the U.S make adjustments for the balance of payment issues?

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