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Assume that in a small open economy with full employment, consumption depends only on disposable income. National saving is 300, investment is given by I = 400 - 20r, where r is the real interest rate in percent, and the world interest rate is 10 percent. a. If government spending rises by 100 , does investment change? What is the level of investment after the change?
b. Does the trade balance change if rises by 100 ? If it changes, does it increase or decrease, and by how much?
c. Does net capital outflow change if rises by 100 ? If it changes, does it increase or decrease, and by how much?
d. Will the real exchange rate rise, fall, or remain constant as a result of the change in ?
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