Question 3 [6 marks] Consider the classical model of a small open economy with perfect capital mobility. Suppose the government introduces an investment tax credit, increasing the incentive for businesses to build new factories. (a)Graphically illustrate the impact of the investment incentive on the real exchange rate and net exports. Be sure to label clearly the following: axes, curves, initial equilibrium values, the direction of curve shifts, and terminal equilibrium values. (3 marks) (b) Explain the impact illustrated in part (a) by referring to the effect on investment, saving, net capital outows, and the demand and supply of the domestic currency in the foreign exchange market. (2 marks) (0) If the economy was initially running a trade decit, what is the impact of the investment incentive on the trade deficit? (1 mark)