Question: Use the textbook’s model of a small, open economy with perfectly mobile capital to predict how each of the following shocks will affect a nation’s national saving (S), investment (I), trade balance (NX), and real exchange rate ( \(\varepsilon \) ), all else equal. For each shock, be sure to clearly state a prediction for all four variables and illustrate your predictions with the relevant supply/demand diagrams.

1. The domestic labor force expands (LS up)
2. Domestic income taxes are reduced (T down)
3. Forecasts of a recession cause an exogenous decrease in autonomous investment (i0 down)
4. An increase in the world’s supply of loanable funds, pushes world interest rates down (rw* down)

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Deliverable: Word Document