Assume the U.S. is a SMALL OPEN economy and the European Union is a LARGE OPEN economy. In addition, suppose the EU cuts tax rates and increases infrastructure spending. State and explain what the effects are on:

a. The levels of investment in the U.S. (please provide a graph using the LF market in the US)

b. U.S. net capital outflow

c. U.S. trade balance

d. U.S. real exchange rate (please provide a graph for Net Exports in the US)

Assume the U.S. is a small open economy and has balanced trade. Suppose Congress is worried about the U.S. economy entering another recession and as a result increases infrastructure spending.

a. Using the LF model, illustrate and describe the effect of this policy on the U.S. trade balance.

b. Using the net exports model, illustrate and describe the effect of this policy on the U.S. real exchange rate.