In the context of National Income Accounting and the Intertemporal model: Consider a country "smartville" with a closed economy real rate of interest of 3% while the prevailing world interest rate is 1.5%.

1. Use the metzler diagram as a framework to critically evaluate the likely outcomes for the "smartville" economy. In your answer refer to the current account balance, savings and investment, comparative advantage, and discuss how "smartville" might gain from opening up to trade with the rest of world in this context.

Consider models of Exchange rate determination.

Assume interest parity holds and the return on a domestic asset is equal to the covered return on a foreign asset. In the domestic economy the central bank decreases the interest rate in order to stimulate the economy.

Using both covered and uncovered interest parity conditions identify the direction variables would be expected to move in response to the policy changes in order to restore parity. What role do expectations play if any in this process?