I attached some pictures

Question 1- Suppose that Canadians decided to spend a smaller fraction of their incomes. Show on the two panel diagram (using the small open economy model) and explain what would be the effect on domestic saving, domestic investment, net capital outflow, the real exchange rate, and the trade balance?

Question 2: Describe supply and demand in the market for loanable funds and the market for foreign-currency exchange. How are these markets linked?

Question 3: Suppose that a textile workers' union encourages people to buy only Canadian-made clothes. What would this policy do to the trade balance and the real exchange rate? What is the impact on the textile industry? What is the impact on the auto industry? Use the 2-panel model of small open economy to support your answer.

FIGURE 13.7 If Mexico is judged to be a risky place to keep savings, savers in Mexico and elsewhere will demand that they receive a risk premium if they are to continue to hold Mexican assets. The The Effects of Capital Flight response of Mexican savers is shown in panel (a) by the upward shift in the curve that repre sents the supply of loenable funds available from the savings of Mexicans. Because borrowers. in Mexico must now pay a higher interest rate, r g, than they paid before the crisis of confi dence, the quantity of loanable funds demanded for domestic investment falls. The increase in the interest rate paid by Mexican borrowers and the shift of the supply curve causes an increase in the net capital outflow of Mexico. Net capital outflow increases from an amount measured by the distance between points A and B to an amount measured by the distance between points X and Y. The increase in net capital outflow means that the supply of pesos in the market for foreign-currency exchange increases. This is shown in panel (b) by the shift to the right of the supply curve from (S /) to(S /). This increase in the supply of pesos causes the peso to depreciate from E. to E,, so the peso becomes less valuable compared with other currencies. (a) The Market for Loanable Funds in Mexico Real Interest 3. With the quantity of loanable funds supplied Rate unchanged and the quantity demanded reduced. Mexico's net capital outflow rises. Supply of loanable funds from national saving (S) 2. To save the same amount 1. An increase in as before, Mexican savers the perceived risk must also receive the risk of holding Mexican premium. assets increases the interest rate paid on Mexican Demand for loanable assets by the funds for domestic amount of the investment ( ) risk premium, "Y Quantity of Loanable Funds (b) The Market for Foreign-Currency Exchange in Mexico Real Exchange Supply of pesos Rate (S M) (5 1)2 4. The increase in Mexico's net capital outflow increases E1 the supply of pesos 5. . . . which .... E2 ause the peso to depreciate, Demand for pesos (NX) Quantity of Pesos