Question 1 The world financial crisis of 2008-2009 began in the U.S. subprime mortgage market, and quickly spread around

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Question 1 The world financial crisis of 2008-2009 began
in the U.S. subprime mortgage market, and quickly spread
around the world. This recession led to a large decrease in
the economy of the U.S. and the Euro area. As a result, there
was a substantial decrease in spending in these countries:
a.What is the impact of a decrease in spending in these
countries on the world savings and world interest rates?
b.Now, show graphically the effects of this contractionary
spending abroad on the market for loanable funds and on
the foreign currency market in Japan (a large open
economy). Be sure to label: i. the axes; ii. the curves; iii.
the initial equilibrium values; iv. the direction the curves
shift; and v. the new long-run equilibrium values
c. State and explain what the long run impact of this
global recession was on Japan’s: real interest rates, levels
of investment, real output, net foreign investment, real
exchange rates () and trade balance (NX).
d. According to the model, was this worldwide contraction
favorable or not to Japan? Explain.