This question has two parts. Use appropriate diagram(s) to illustrate your answer to part (a).You do not need to illustrate your answer to part (b) with a figure.

Assume alargeopen economy begins with a balanced budget and then decides to increase taxes.

a) What will be the effect of this policy change in thelargeopen economy on:a) national savings b) net exports c) the domestic real rate of interest?

b) With respect to the changes described above, how will the policy change in thelargeopen economy affect interest rates, net capital flows and net exports in (a) asmallopen economy and (b) aclosedeconomy?