You have been appointed policy advisor of the country Economia. The country is an open economy, has a floating exchange

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You have been appointed policy advisor of the country Economia.
The country is an open economy, has a floating exchange rate regime
and uses the Econ as its currency.
Economia has historically had a current account surplus. The
pension system is not generous and its ageing population has been
saving an increasing amount for retirement. The savings are used to
purchase foreign bonds, which are viewed as a safe and liquid asset
by Economia’s residents.
a. Use the appropriate model from class to show the effect of
the increase in saving on Economia’s current account and the world
real interest rate. (6 marks)
b. Use the appropriate model from class to show the effect of
the increase in saving on Economia’s exchange rate (𝐸𝐸𝑐𝑜𝑛/𝐹). (6
marks)
c. Should the government be worried about the increase in
saving? Explain. (6 marks)
d. The government is considering three alternative policy
responses to reduce current account imbalances. Advise the
government on whether these policies would achieve that objective.
(12 marks)
Policy 1 Increase public spending on infrastructure
Policy 2 Increase the generosity of the pension system
Policy 3 Promote spending on housing by increasing the loan-
to-value ratio (LTV)