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University of British Columbia Econ 302 Tutorial 5 11thJuly 2012 Question 1 Suppose that in the flexible-price full-employment model, the government increases taxes and government purchases by equal amounts. The tax increase reduces consumption spending. What happens--qualitatively (tell the direction of change only) to investment, net exports, the exchange rate, the real interest rate, and potential output? Government spending rises by more than consumption falls, so there is a net reduction in total saving. The equilibrium interest rate rises. Investment spending falls. The value of the exchange rate falls. And net exports fall. Potential output is unchanged. Question 2 Give three examples of changes in economic policy or in the economic environment that would shift the total savings curve on the flow-of-funds diagram to the left.