In a small open economy, output (gross domestic product) is $25 billion, government purchases are $6

billion, and net factor payments from abroad are zero. Desired consumption and desired investment are

related to the world real interest rate in the following manner:

World Real Interest Rate Desired Consumption Desired Investment

5% $12 billion $3 billion

4% $13 billion $4 billion

3% $14 billion $5 billion

2% $15 billion $6 billion

For each value of the world real interest rate, find national saving, foreign lending, and absorption.

Calculate net exports as the difference between output and absorption. What is the relationship between net

exports and foreign lending?