Studies indicate that net exports and net capital outflows tend to be equal.
a) Why are net exports and net capital outflows tend to be equal? How does an increase in the price level change interest rates?
b) How does this change in interest rates lead to changes in investment and net exports?
3) Assume there is a decrease in the demand for goods and services, which leads to a decrease in the real GDP and eventually the economy into recession.
a) When the economy enters recession due to a decline in demand, what will happen to the price level?
b) Assume there is no government intervention. What will ensure that the economy still eventually gets back to the natural rate of output (real GDP)?