1. Suppose a country starts with CA = 0 and government savings S^g₀. Then there is an increase in deficit spending, so S^g₁g₀. What happens to CA and KFA? This is called the Twin Deficits Problem. If the starting position is CA > 0, then explain why a decrease in S^gmay not result in CA

\fS4+SP(ry.W) (r ,profits,) 1(r,profits ) Loanable Funds $ Figure 8: Open economy - Increase in Investment