Consider the classical model of a small open economy with perfect capital mobility. Suppose domestic political stability improves and optimism about future conditions increases, causing firms to raise their investment sharply.Based on the above information, answer the following questions.What impact will the increase in investment demand have on the real interest rate of the small open economy? Briefly explain your answer. (2 marks)What impact will the increase in investment demand have on net capital outflow in the small open economy? Briefly explain your answer. (2 marks)Explain the long-run impact of the increase in investment demand on the real exchange rate and net exports. Briefly explain your answers by referring to the affected curves in the market for foreign exchange. (2 marks)

What impact will the increase in investment demand have on the real interest rate of the small open economy? Briefly explain your answer. (2 marks)

What impact will the increase in investment demand have on net capital outflow in the small open economy? Briefly explain your answer. (2 marks)

Explain the long-run impact of the increase in investment demand on the real exchange rate and net exports. Briefly explain your answers by referring to the affected curves in the market for foreign exchange.

In the classical model of a closed economy, which of the following best describes the effect of an increase in the real interest rate on national savings and investment, assuming the economy is initially in equilibrium?

Consider a small open economy that takes the world real interest rate as given. Suppose the world real interest rate is less than the country’s autarky real interest rate. Which of the following is TRUE? Group of answer choices None of the other options There is excess demand for capital Domestic saving exceeds domestic investment There is capital outflow