Open Economy and Trade (a) Indicate whether the following statement is true, false, or uncertain and explain your answer using words, graphs and equations as appropriate (i) In a classical small open economy, if net capital outflow is positive, then the trade balance must also be positive. (ii) The adoption of an investment tax credit in a classical small open economy is likely to lead to an increase in domestic investment and a fall in the exchange rate. (iii) In a Keynesian small open economy with a fixed exchange rate, an effective policy to increase equilibrium output is to increase the money supply.
