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If a small open economy cuts defense spending, what happens to saving, investment, the trade Balance, the interest rate and the exchange rate.?
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If a small open economy cuts defense spending, what happens to saving,...
Effects of cutting defense spending in a small open economy:

  • Saving: Cutting defense spending can lead to an increase in saving as the government is reducing its expenditures. This can result in higher national saving rates, which can be beneficial for the economy in the long run.
  • Investment: With the decrease in defense spending, the government can reallocate funds towards other sectors such as infrastructure, education, or healthcare. This can potentially boost investment levels in the economy and stimulate economic growth.
  • Trade Balance: A cut in defense spending can improve the trade balance of a small open economy. As the government reduces its spending on defense imports, the trade deficit may decrease, leading to a more favorable balance of trade.
  • Interest Rate: The interest rate in the economy may decrease as a result of cutting defense spending. With higher levels of saving and potentially increased investment, there may be less demand for borrowing, leading to lower interest rates.
  • Exchange Rate: The exchange rate of the small open economy may appreciate due to the positive effects of cutting defense spending. A stronger economy with higher saving rates and increased investment can attract foreign investors, leading to an appreciation of the exchange rate.

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If a small open economy cuts defense spending, what happens to saving, investment, the trade Balance, the interest rate and the exchange rate.?
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