2. Real Exchange Rate. Consider a small country with perfect capital mobility and a oating exchange rate. Assume the country's currency is dollars. a. The real exchange rate 6 is just the relative price of domestic goods to foreign goods. As 6 falls, what happens to net exports? Plot the relationship on a graph. Label the x- and y-axes with the appropriate variables. b. In our model, we assume the net capital outow equals savings minus investment. We assume savings are fixed by the consumption function and fiscal policy, and investment is xed by the investment function and the world interest rate. Plot the curve for net capital outflows on your graph in part a.). c. In terms of the supply and demand for dollars (the domestic currency). what does the equilibrium point represent? d. Suppose the government raises government spending (expansionary fiscal policy). What is the impact on national saving? How does this affect the supply of dollars (loanable funds)? e. Does the change in the supply of dollars raise or lower the value of the domestic currency? What effect does this have on the real exchange rate? f. Does the change in the real exchange rate make domestic goods cheaper or more expensive relative to foreign goods? What effect does this have on net exports? Show the effects of the scal policy in your graph from part a.). 6qu