Homework Help is Here – Start Your Trial Now!
Business
Economics
3. Effects of a government budget deficit Suppose a hypothetical open economy uses the U.S. dollar as currency. The table below presents data describing the relationship between different real interest rates and this economy's levels of national saving, domestic investment, and net capital outflow. Assume that the economy is currently operating under a balanced government budget. Real Interest Rate (Percent) 7 6 5 4 3 2 REAL INTEREST RATE 10 8 2 0 Given the information in the table above, use the blue points (circle symbol) to plot the demand for loanable funds. Next, use the orange points (square symbol) to plot the supply of loanable funds. Finally, use the black point (cross symbol) to indicate the equilibrium in this market. (? 0 National Saving (Billions of dollars) 60 55 50 45 40 35 20 Domestic Investment (Billions of dollars) 30 35 40 45 Market for Loanable Funds 40 60 QUANTITY OF LOANABLE FUNDS 50 55 80 Net Capital Outflow (Billions of dollars) -15 100 Demand -0- Supply -10 -5 0 Equilibrium 5 10

3. Effects of a government budget deficit Suppose a hypothetical open economy uses the U.S. dollar as currency. The table below presents data describing the relationship between different real interest rates and this economy's levels of national saving, domestic investment, and net capital outflow. Assume that the economy is currently operating under a balanced government budget. Real Interest Rate (Percent) 7 6 5 4 3 2 REAL INTEREST RATE 10 8 2 0 Given the information in the table above, use the blue points (circle symbol) to plot the demand for loanable funds. Next, use the orange points (square symbol) to plot the supply of loanable funds. Finally, use the black point (cross symbol) to indicate the equilibrium in this market. (? 0 National Saving (Billions of dollars) 60 55 50 45 40 35 20 Domestic Investment (Billions of dollars) 30 35 40 45 Market for Loanable Funds 40 60 QUANTITY OF LOANABLE FUNDS 50 55 80 Net Capital Outflow (Billions of dollars) -15 100 Demand -0- Supply -10 -5 0 Equilibrium 5 10

Brief Principles of Macroeconomics (MindTap Course List)
Brief Principles of Macroeconomics (MindTap Course List)
8th Edition
ISBN:9781337091985
Author:N. Gregory Mankiw
Publisher:N. Gregory Mankiw
Chapter8: Savings,investment And The Financial System
Section: Chapter Questions
Problem 8PA
See similar textbooks
icon
Related questions
Question
3. Effects of a government budget deficit Suppose a hypothetical open economy uses the U.S. dollar as currency. The table below presents data describing the relationship between different real interest rates and this economy's levels of national saving, domestic investment, and net capital outflow. Assume that the economy is currently operating under a balanced government budget. Real Interest Rate (Percent) 7 6 5 REAL INTEREST RATE 10 8 0 4 3 2 0 National Saving (Billions of dollars) 60 Given the information in the table above, use the blue points (circle symbol) to plot the demand for loanable funds. Next, use the orange points (square symbol) to plot the supply of loanable funds. Finally, use the black point (cross symbol) to indicate the equilibrium in this market. 20 55 50 45 40 35 Domestic Investment (Billions of dollars) 30 35 40 Market for Loanable Funds 40 60 QUANTITY OF LOANABLE FUNDS 80 45 50 55 Net Capital Outflow (Billions of dollars) -15 -10 -5 0 5 100 O Demand -0 Supply 10. Equilibrium (?)
Transcribed Image Text:3. Effects of a government budget deficit Suppose a hypothetical open economy uses the U.S. dollar as currency. The table below presents data describing the relationship between different real interest rates and this economy's levels of national saving, domestic investment, and net capital outflow. Assume that the economy is currently operating under a balanced government budget. Real Interest Rate (Percent) 7 6 5 REAL INTEREST RATE 10 8 0 4 3 2 0 National Saving (Billions of dollars) 60 Given the information in the table above, use the blue points (circle symbol) to plot the demand for loanable funds. Next, use the orange points (square symbol) to plot the supply of loanable funds. Finally, use the black point (cross symbol) to indicate the equilibrium in this market. 20 55 50 45 40 35 Domestic Investment (Billions of dollars) 30 35 40 Market for Loanable Funds 40 60 QUANTITY OF LOANABLE FUNDS 80 45 50 55 Net Capital Outflow (Billions of dollars) -15 -10 -5 0 5 100 O Demand -0 Supply 10. Equilibrium (?)
On the following graph, plot the relationship between the real interest rate and net capital outflow by using the green points (triangle symbol) to plot the points from the initial data table. Then use the black point (X symbol) to indicate the level of net capital outflow at the equilibrium real interest rate you derived in the previous graph. REAL INTEREST RATE -20 EXCHANGE RATE Net Capital Outflow -6 -15 10 -15 -10 0 5 10 16 NET CAPITAL OUTFLOW (Billions of dollars) 8 2 -10 0 Effects of a Budget Deficit Because of the relationship between net capital outflow and net exports, the level of net capital outflow at the equilibrium real Interest rate implies that the economy is experiencing Now, suppose the government is experiencing a budget deficit. This means that to loanable funds. 10 Market for Foreign-Currency Exchange After the budget deficit occurs, suppose the new equilibrium real interest rate is 6%. The following graph shows the demand curve in the foreign- currency exchange market. Use the green line (triangle symbol) to show the supply curve in this market before the budget deficit. Then use the purple line (diamond symbol) to show the supply curve after the budget deficit. 0 -50 10 QUANTITY OF DOLLARS (Billions) 20 Demand 5 NCO 15 + 20 Eqm, NCO Summarize the effects of a budget deficit by filling in the following table. (? A Initial Supply 1 Supply with Deficit Y which leads (?) Real Interest Rate Real Exchange Rate Trade Balance
Transcribed Image Text:On the following graph, plot the relationship between the real interest rate and net capital outflow by using the green points (triangle symbol) to plot the points from the initial data table. Then use the black point (X symbol) to indicate the level of net capital outflow at the equilibrium real interest rate you derived in the previous graph. REAL INTEREST RATE -20 EXCHANGE RATE Net Capital Outflow -6 -15 10 -15 -10 0 5 10 16 NET CAPITAL OUTFLOW (Billions of dollars) 8 2 -10 0 Effects of a Budget Deficit Because of the relationship between net capital outflow and net exports, the level of net capital outflow at the equilibrium real Interest rate implies that the economy is experiencing Now, suppose the government is experiencing a budget deficit. This means that to loanable funds. 10 Market for Foreign-Currency Exchange After the budget deficit occurs, suppose the new equilibrium real interest rate is 6%. The following graph shows the demand curve in the foreign- currency exchange market. Use the green line (triangle symbol) to show the supply curve in this market before the budget deficit. Then use the purple line (diamond symbol) to show the supply curve after the budget deficit. 0 -50 10 QUANTITY OF DOLLARS (Billions) 20 Demand 5 NCO 15 + 20 Eqm, NCO Summarize the effects of a budget deficit by filling in the following table. (? A Initial Supply 1 Supply with Deficit Y which leads (?) Real Interest Rate Real Exchange Rate Trade Balance
Expert Solution
trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 3 steps with 1 images

SEE SOLUTIONCheck out a sample Q&A here
Blurred answer
Knowledge Booster
Market for loanable funds
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.
Recommended textbooks for you
Brief Principles of Macroeconomics (MindTap Cours…
Brief Principles of Macroeconomics (MindTap Cours…
Economics
ISBN:
9781337091985
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning
Essentials of Economics (MindTap Course List)
Essentials of Economics (MindTap Course List)
Economics
ISBN:
9781337091992
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning
Principles of Macroeconomics (MindTap Course List)
Principles of Macroeconomics (MindTap Course List)
Economics
ISBN:
9781285165912
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning
Principles of Macroeconomics (MindTap Course List)
Principles of Macroeconomics (MindTap Course List)
Economics
ISBN:
9781305971509
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning
Principles of Economics 2e
Principles of Economics 2e
Economics
ISBN:
9781947172364
Author:
Steven A. Greenlaw; David Shapiro
Publisher:
OpenStax
SEE MORE TEXTBOOKS