Explanation : The fundamental relationship between saving, investment, the fiscal
balance, and the trade balance is S = I + (G – T) + (X – M). Given the
levels of output and investment spending, a decrease in saving (increase
in consumption) must be offset by either a decrease in the fiscal deficit
or a decrease in net exports. Decreasing the fiscal deficit is not one of
the choices, so a decrease in net exports and corresponding decrease in
net capital outflows (decreased lending to foreigners and/or decreased
purchases of assets from foreigners) is the correct response.
Explanation : IS curve shows an inverse relationship between income and the real
interest rate. When interest rates are high, investments fall and
therefore income must fall as well.