3. Suppose that American firms become more pessimistic and decide to reduce investment expenditure today in new factories and office space.

a. How will this decrease in investment affect output, interest rates, and the current account?

b. Now repeat part (a), assuming that domestic investment is very responsive to the interest rate so that U.S. firms will cancel most of their changes in investment plans if the interest rate falls. How will this affect the answer you gave previously?