Economia has historically had a current account surplus. The pension system is not generous and its ageing population ha

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Economia has historically had a current account surplus. The
pension system is not generous and its ageing population has been
saving an increasing amount for retirement. The savings are used to
purchase foreign bonds, which are viewed as a safe and liquid asset
by Economia’s residents.
a. Use the appropriate model from class to show the effect of the
increase in saving on Economia’s current account and the world real
interest rate. (6 marks)
b. Use the appropriate model from class to show the effect of the
increase in saving on Economia’s exchange rate (𝐸𝐸𝑐𝑜𝑛/𝐹 ). (6
marks)
c. Should the government be worried about the increase in saving?
Explain. (6 marks)
d. The government is considering three alternative policy responses
to reduce current account imbalances. Advise the government on
whether these policies would achieve that objective. (12
marks)
Policy 1 Increase public spending on infrastructure
Policy 2 Increase the generosity of the pension system Policy 3
Promote spending on housing by increasing the loan- to-value ratio
(LTV)