a.5 marks]Draw 2 diagrams (1 of loanable funds market and the other of foreign exchange market) for a small open economy where the world real interest rate is higher than domestic real interest rate . Draw the initial equilibrium in both markets and label them completely.

[5 marks]On the same set of diagrams, show the effect of a decrease in national saving in both markets. Clearly show the new equilibrium in both markets with all the labels.

a.Explain what happens to the following with reasons for change in each.

i-real interest rate

i-net capital outflow

i-real exchange rate

i-net exports