Consider the GNP equation Y=C+I+CA for common definitions of macroeconomic variables.

Consider the GNP equation

Y =C+I+CA

for common definitions of macroeconomic variables.

(a) (7 Points) Using this condition and the definition of domestic sav- ings, show that domestic savings go to two uses in open economies: domestic investment and foreign credit.

(b) (3 Points) When a Hong Kong resident chooses to invest in London real estate instead of investing domestically, how does the Hong Kong current account respond? How does the UK current account respond? If the UK current account were balanced initially, would the UK become a net borrower or net lender?

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