Assume that in a small open economy with full employment, consumption depends only on disposable income. National saving is 300, investment is given by I = 400 - 20r, where r is the real interest rate in percent, and the world interest rate is 10 percent.
a) If government spending rises by 100, does investment change? What is the level of investment after the rise in government spending?
b) Does the trade balance change if G rises by 100? If it changes, does it increase or decrease, and by how much?
c) Does net capital outflow change if G rises by 100? If it changes, does it increase or decrease, and by how much?
d) Will the real exchange rate rise, fall, or remain constant as a result of the change in G?