2. Suppose that your government introduces an investment tax credit, which subsidizes domestic investment.
How does this policy affect national saving, domestic investment, net
capital outflow, the interest rate, the exchange rate, and the trade balance?

Explanation:

If the Congress passes an investment tax credit, this move will subsidizes domestic investment.

The drive to increase domestic investment causes firms to go for more loan, thus increasing the demand for loanable funds.

This causes the real interest rate to go up, consequently reducing the net capital outflow.

The downward slide in net capital outflow reduces the cash flow in the market for foreign exchange, invariably raising the real exchange rate.

The trade balance in the market also moves toward fiscal deficit, because net capital outflow, then the net exports, is lower.

The higher real interest rate also increases the quantity of national saving.

In short as saving increases, domestic investment increases, then net capital outflow declines, the real interest rate increases, the real exchange rate increases, and the trade balance moves toward a minus and deficit.

eds? ederal government or feds

a

explanation: