Suppose the equation for private savings in Canada = 2 + 0.01 where is the real interest rate and is the amount of loanable funds. The government savings is currently at = 100 (fiscal budget surplus). The demand for loanable funds equation = 7 0.01. (a) Use the graphs provided on next page to help you illustrate and explain how to determine the equilibrium values for real interest rate , national savings , and investment if Canada is a closed economy. (b) Suppose there are only two countries (Canada and Japan) in the world. Both countries allow free trade with perfect capital mobility. The prevailing world real interest rate = 4.5%. The equation for net exports in Canada = 2 0.005$ where is the real exchange rate and $ is the amount of Canadian dollars in the foreign exchange market. One basket of Canadian output costs $ = $20 and one basket of Japanese output costs = 2,400 with the assumption of price rigidity. Use the same graphs to help you illustrate and explain how to determine the equilibrium values for national savings , investment , net capital outflow , net exports , real exchange rate , and nominal exchange rate . (c) Use the same information and graphs from part (b) to help you illustrate and explain how to determine the equilibrium values for national savings , investment , net capital outflow , net exports , real exchange rate , and nominal exchange rate if the world real interest rate increases to = 5%. (d) Use the same information and graphs from part (b) to help you illustrate and explain how to determine the equilibrium values for national savings , investment , net capital outflow , net exports , real exchange rate , and nominal exchange rate if Canada becomes politically unstable resulting in a risk premium = 1.5%

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