Problem
Consider a small open economy with a perfectly elastic supply of savings at interest rate 7*, which is below the interest rate which would have prevailed in the economy if it could not have borrowed, and a normal investment curve. Show the market equilibrium, including the magnitude of foreign bon-owing.
a. Now show the effect of an increased budget deficit.
b. Show the effect of an increased budget deficit which originates as a result of increased public investment, in which the public investment is a complement to private investment.
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.