Long-run effects of rise in safe-haven capital inflow

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Reference no: EM131169530

In the five years ending 2011, Switzerland enjoyed a fiscal surplus that averaged 1.3% of GDP, a trade surplus that averaged 2.6% of GDP, and a government debt to GDP ratio that averaged 40%. With the Eurozone economies rocked by a destabilizing sovereign debt crisis, investors over the world consider Switzerland as a safe-haven and increase their purchases of Swiss assets. Assume Switzerland is a small open economy and its consumption demand is a function of disposable income only.

Use the appropriate graphs for a small open economy to illustrate and explain the theoretical long-run effects of the rise in “safe-haven” capital inflow into Switzerland on each of the following: Switzerland’s national savings, investment, net capital outflow, net exports, and the real exchange rate of the Swiss franc.

Reference no: EM131169530

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