The following is a saving-investment diagram for a small open economy:
a) If the world real interest rate is indicated by "C", what does the difference between values "H" and "D" measure? At world real interest "C", what is the direction of capital flows for this economy? Explain.
b) Suppose starting from a world real interest rate at "C", there is a decrease in government budget deficits. How does this affect (i) the saving curve; (ii) the investment curve; (iii) the world interest rate; and (iv) capital flows? Please provide clear explanations.