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The Role of the Foreign Sector in the Economic Cycle The foreign sector is when a country cannot satisfy

their needs effectively between the closed economy: households, businesses and the government. Countries then convert to an open economy to satisfy their needs effectively. To solve the problem that the country is having they have to trade with other countries to gain a strong economy so that they will be able to satisfy the needs of their people. When countries trade they do not have to rely solely on their own resources because they can sell it and gain other resources form the different countries. Some countries may not have good access to resources so they will not be able to use the foreign sector effectively.

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Role of financial markets The economic textbook tells us that financial markets, or, more broadly, the financial system, matter for growth as they can produce an efficient allocation of resources from savers to productive investors. They also dilute risk by spreading it across a large pool of economic agents and by so doing they reduce the costs of economic failure. In other words, financial markets can reduce both the probability of systemic instability, and, if a systemic crisis does occur, its cost.

Role of govt sector The relationship between the size of government, economic growth, and volatility in a small openeconomy is analyzed. First, we characterize the stochastic equilibrium for a centrally planned economy, contrasting it with a closed economy. The role of government consumption expenditure both as a stabilizing and a destabilizing factor is discussed. The optimal size of government is derived and we find that an openeconomy will have a larger government if and only if it is a net creditor. Second, the stochastic equilibrium in a decentralized economy is characterized and the optimal tax structure derived. Finally, the role of government production expenditure and its impact on risk is briefly discussed.