3. Effects of a government budget deficitConsider a hypothetical open economy. The following table presents data on the relationship between various real interest rates and national saving, domestic investment, and net capital outflow in this economy, where the currency is the U.S. dollar. Assume that the economy is currently experiencing a balanced government budget.Real Interest RateNational SavingDomestic InvestmentNet Capital Outflow(Percent)(Billions of dollars)(Billions of dollars)(Billions of dollars)76030-1065540-555050044560534070102358015 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 A trade deficit/ balenced Trade/A trade surplus. Now, suppose the government is experiencing a budget deficit. This means that National savings will increase/ decreace National savings will increase/decrease ,which leads to Increacing supply/decreasing supply/decrease demand/ Increase demand loanable funds. On the following graph, plot the relationship between the real interest rate and net capital outflow by using the green points (triangle symbol) to plotthe 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 interestrate you derived in the previous graph.Net Capital Outflow10NCO86Eqm. NCO-20-15-10-55101520NET CAPITAL OUTFLOW (Billions of dollars)Because of the relationship between net capital outflow and net exports, the level of net capital outflow at the equilibrium real interest rate impliesthat the economy is experiencingNow, suppose the government is experiencing a budget deficit. This means thatwhich leads toloanable funds.REAL INTEREST RATE Given the information in the preceding table, 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.?)Market for Loanable Funds10Demand8SupplyEquilibrium220406080100QUANTITY OF LOANABLE FUNDSOn the following graph, plot the relationship between the real interest rate and net capital outflow by using the green points (triangle symbol) to plotthe 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 interestrate you derived in the previous graph.REAL INTEREST RATE

The loanable fund market attains equilibrium when the funds available with the surplus units are…

Answered: 3. Effects of a government budget…

Exploring Economics

8th Edition

ISBN:9781544336329

Author:Robert L. Sexton

Publisher:Robert L. Sexton

Chapter21: Financial Markets, Saving, And Investment

Section: Chapter Questions

Problem 6P

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3. Effects of a government budget deficit

Consider a hypothetical open economy. The following table presents data on the relationship between various real interest rates and national saving, domestic investment, and net capital outflow in this economy, where the currency is the U.S. dollar. Assume that the economy is currently experiencing a balanced government budget.

Real Interest Rate	National Saving	Domestic Investment	Net Capital Outflow
(Percent)	(Billions of dollars)	(Billions of dollars)	(Billions of dollars)
7	60	30	-10
6	55	40	-5
5	50	50	0
4	45	60	5
3	40	70	10
2	35	80	15

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 A trade deficit/ balenced Trade/A trade surplus.

Now, suppose the government is experiencing a budget deficit. This means that National savings will increase/ decreace National savings will increase/decrease ,which leads to Increacing supply/decreasing supply/decrease demand/ Increase demand loanable funds.

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.
Net Capital Outflow
10
NCO
8
6
Eqm. NCO
-20
-15
-10
-5
5
10
15
20
NET CAPITAL OUTFLOW (Billions of dollars)
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
which leads to
loanable funds.
REAL INTEREST RATE

Given the information in the preceding table, 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.
?)
Market for Loanable Funds
10
Demand
8
Supply
Equilibrium
2
20
40
60
80
100
QUANTITY OF LOANABLE FUNDS
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

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