3. The two least-discussed sectors of the economy are the government (also called the public sector) and the rest of the world (also called the foreign sector). An economy that includes foreign trade, or trade with the rest of the world, is called an open economy, and its opposite is a closed economy.

A. Consider the savings equals investment equation, I = S + (T - G) + (M - X). How is investment affected when an economy moves from being closed to being open? Explain your answer. (4 points)

B. Consider the leakage equals injections equation, I + G + X = S + T + M. What is the effect of a public sector balanced budget (where G=T) on the economy, according to this equation? What if the government runs a budget deficit? (4 points)