Assume the U.S. is a small open economy (contrary to fact) and its trading partner is Japan. The trade balance is initially zero. The nominal exchange ise=Yen/$.

Suppose there is a increase in the world interest rater*. Answer questions 1-3

1. What happens to the U.S. net capital outflow? Explain.
2. What happens to the equilibrium net exports? Explain.
3. What happens to the real exchange rate? Explain by showing and explaining the shifts, if any