= RateSpread. Consider a small country in the global economy. There is a world real interest rate of 2%, i.e. rw 0.02. This country has perfectly inelastic domestic savings of S = 80 dollars. The demand for investment in this country is I(r) = 150 1000r. = (a) Draw the capital market diagram for this country. Remem- ber, it doesn't clear because the country can borrow and lend in international markets. Label the amount invested and the amount of net capital flows (NCF) into or out of the country. (b) Bad news. This country has become unstable and is now per- ceived as very risky. As a result, a spread of 2% opens up in the capital market. This means that now the country has to borrow or lend internationally at r' = 0.04. Show on the graph. (C) Suppose that inflation in this country has been consistently equal to 3%. Suppose there were a bond issued before the instability began. It has a coupon rate of 5%. What is the most reasonable guess for its yield now: 3%, 5%, or 7%? Explain, including whether the price of this bond rises, falls, or stays the same. =