1.

(a)Assume an economy is small and open. Draw a Saving-Investment diagram in which the goods market equilibrium for this economy has net capital outflows. Indicate on the graph the goods market equilibrium levels of saving, investment, amount of net capital outflows, and the prevailing real interest rate.

(b) Assume the economy is still small and open as in part (a), and fiscal policymakers decrease taxes. What happens to saving, investment, the prevailing real interest rate, and net capital flows in the goods market equilibrium? Use a saving- investment diagram to show the effects of the policy, indicating the old and new goods market equilibria.

*Explain your answers and show shifts of graphs clearly indicating changes in equilibria.