Consider a small open economy with perfect capital mobility and a flexible exchange rate. Suppose that net capital outflow (NCO) is positive at the world interest rate. Use a two-panel graph to explain the following.

1. What is the is the effect of a decrease in world interest rate on (i) national saving, (ii) domestic investment, (iii) NCO, (iv) the real exchange rate, and (v) net exports?

2. What is the is the effect of an increase in the government budget surplus on (i) national saving, (ii) domestic investment, (iii) NCO, (iv) the real exchange rate, and (v) net exports?