Plot graphs and show calculation where necessary.

Question 1: Short answer questions

1.How does an increase in desired national saving in a large open economy affect the world real interest rate? How does an increase in desired investment affect it? Why do changes in desired saving or investment in large open economies affect the world real interest rate but changes in desired saving or investment in small open economies do not?

2.If you knew that the economy was falling into a recession, what would you expect to happen to production during the next few quarters? To investment? To average labor productivity? To the real wage? To the unemployment rate?