Consider an increase in (domestic) taxes (T).

a. Consider the event in the long-run closed economy model. How will private and public savings be affected? Explain. Illustrate graphically using the domestic loanable funds market how such an event will affect the equilibrium domestic national savings, domestic investment spending and domestic real interest rate. Explain.

b. Consider the same event, but now in the long-run small open economy model . (Assume the economy is originally running a trade surplus.):-

i) Illustrate graphically using the domestic loanable funds market how such event will affect the equilibrium domestic national savings, domestic investment spending, net capital outflow and domestic real interest rate. Explain how the differences in the results obtained here from the results obtained in (a) come about.

ii) Consider again the same event the long-run small open economy context. Illustrate graphically using the "foreign exchange" market how such event will affect the equilibrium net exports and the real exchange rateWill domestic currency appreciate or depreciate ? Explain.

You need to show your explanations and works in order to earn points in this question).