Question

In a small open economy, the desired domestic savings ($S^d$) and the desired domestic investment ($I^d$) are as follows, where $r^w$ is the world real interest rate. \[ S^d = 10 + 100r^w, \quad I^d = 15 - 100r^w \] If $r^w = 3%$, the current account balance in the equilibrium would be ___________. (in integer) 
 

Hint:

In an open economy, the current account balance equals the difference between domestic savings and investment: $CA = S - I$.

Answer 1

Correct Answer: 1

Step 1: Compute savings and investment.
Given $r^w = 3% = 0.03$, \[ S^d = 10 + 100(0.03) = 13, \quad I^d = 15 - 100(0.03) = 12. \]
Step 2: Calculate current account balance.
\[ \text{CA} = S^d - I^d = 13 - 12 = 1. \]
Step 3: Conclusion.
\[ \boxed{\text{CA} = 1} \] (in integer).