(a) Suppose that the government has recently reduced the extant tax incentive for saving and simultaneously introduced an investment tax credit in India. Explain the impacts on, and implications for, loanable funds, net capital outflow, and real exchange rate in India. Diagram/s required.

(b) Suppose the government increases its expenditure by RM8 billion in a country. Explain how this may influence the real output. Diagram not required.