Suppose there is an exogenous increase in investment. Use the large open economy model to answer...

Suppose there is an exogenous increase in investment. Use the large open economy model to answer the following:

1. Will the domestic real interest rate change? Explain.

2. Does this shock affect net capital outflows? Explain why or why not.

3. What happens to the value of the domestic currency in the foreign exchange market? Why does the value of the domestic currency change?

4. Will net exports change? Why or why not?

5. Will domestic investment change? Why or why not?

Expert Solution

Rahul Sunny answered 2 years ago

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