Consider an open economy. Assume that nominal wages are sticky and that firms determine the level of employment in the short run. Speculate on what would happen to the real exchange rate, the nominal exchange rate, net exports, the domestic real interest rate, domestic output, and domestic investment, domestic nominal and real wages, and labor if:

a. (5 points) There is a large increase in savins in the rest of the world (but not in the domestic economy).

b. (5 points) Domestic money supply increases.

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