Question 4: Suppose that Parliament passes an investment tax credit, which subsidizes domestic investment. How does this policy affect national saving, domestic investment, net capital outflow, the interest rate, the exchange rate, and the trade balance? Use the small open economy model to show the changes and explain.

Question 5: Suppose the French suddenly develop a strong taste for British Columbia wines. Answer the questions in words and using a diagram: What happens to the demand for dollars in the market for foreign-currency exchange? What happens to the value of dollars in the market for foreign-currency exchange? And what happens to the quantity of net exports?