Reference no: EM131483590

Classical small open economy model: According to the Classical small open economy model, what happens to domestic national saving, investment, the trade balance, and the real exchange rate in response to each of the following events? Draw a loanable funds market diagram and a net exports diagram to illustrate your answer in each case. (For these diagrams, let's assume that the country starts out running a current account surplus and capital account deficit, as in the examples in class.)

a) A fall in consumer confidence about the future induces domestic consumers to spend less and save more.

b) A tax reform increases the incentive of businesses to build new factories.

c) The introduction of a stylish new domestically-produced electric car makes some consumers switch from buying a foreign-produced car to buying a domestic one.