Answer
a) If the elasticity of net capital outflow with respect to the interest rate is high, the increase in private saving will be very large. However, this increase in private saving will not affect private investment in the United States very much. (There will be a small impact on private investment.)
Work Step by Step
b) Increasing private saving will decrease the interest rate. In turn, the decreased interest rate will increase the net capital outflow, and the exchange rate decreases.
If the elasticity is low, then a very large decrease in the exchange rate to increase U.S. exports by the same quantity as the increase in the net capital outflow.
