Problem 1. Twin Deficits A small open economy has GDP of 700. The government collects 20% of national income in taxes and initially keeps the budget balanced. There are no transfers or public debt. The consumption function is C = 60 + 0.5Yp where YD is disposable income. The investment function is I = 540 - 10,000r. The world interest rate is rW = 3%. Net factor payments are NFP = -100. (A) Find the taxes and government spending. (B) Find the initial equilibrium: find savings S, investment I, and the current account CA. Is there net capital inflow or net capital outflow? Is there current account surplus or current account deficit? (C) The government expands its spending by 40 through borrowing on the loanable funds market. Find the new equilibrium (S, I). Is there a budget surplus or budget deficit now? Is there net capital inflow or net capital outflow? Is there current account surplus or current account deficit? (D) On the loanable funds market, show the initial situation and the new equilibrium