4. Small Open Economy and trade deficit Suppose that Ecuador is a small open economy running a trade deficit. a. In a plot that has the interest rate in the vertical axis and S and I in the horizontal axis, show where the world interest rate r* should be relative to the "closed-economy equilibrium interest rate", rc. b. Show the effect on Savings, Investment and the real interest rate of an increase in technological progress in Ecuador that is expected to increase TFP. c. What is the effect of this shock on the trade balance? Show the trade balance in your plot.

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