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 currentlyexperiencing a balanced government budget.Real Interest Rate(Percent)7National Saving(Billions of dollars)55Domestic Investment(Billions of dollars)Net Capital Outflow(Billions of dollars)30-1565040-1054550-54406003357052308010Given 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 Funds10ODemand8OSupply*+Equilibrium20408060QUANTITY OF LOANABLE FUNDSREAL INTEREST RATE6200100 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 Outflow10A8NCO+6Eqm. NCOREAL INTEREST RATE-10051015NET CAPITAL OUTFLOW (Billions of dollars)6-20-15-10-505101520NET CAPITAL OUTFLOW (Billions of dollars)Because of the relationship between net capital outflow and net exports, the level of het capital outflow at the equilibrium real interest rate impliesthat the economy is experiencing▼which leads toNow, suppose the government is experiencing a budget deficit. This means thatloanable funds.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.REAL INTEREST R-20 -155och20Eqm. NCO

Below table represents the computation of investment + net capital outflow Real interest rate…

al Saving of dollars) 55 50 45 40 Domestic Investment (Billions of dollars) 30 40 50 60 70 Net Capital Outflow (Billions of dollars) -15 -10 -5 35 5 30 80 10 table, use the blue points (circle symbol) to plot the demand for loanable funds. Next, use th loanable funds. Finally, use the black point (cross symbol) to indicate the equilibrium in this m e Funds Demand Supply Equilibrium 70

al Saving of dollars) 55 50 45 40 Domestic Investment (Billions of dollars) 30 40 50 60 70 Net Capital Outflow (Billions of dollars) -15 -10 -5 35 5 30 80 10 table, use the blue points (circle symbol) to plot the demand for loanable funds. Next, use th loanable funds. Finally, use the black point (cross symbol) to indicate the equilibrium in this m e Funds Demand Supply Equilibrium 70

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

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Similar questions

Explain how a shift from a government budget deficit to a budget surplus might affect the exchange rate.
Based on the national saving and investment identity, what are the three ways the macroeconomy might react to greater government budget deficits?
During the most recent recession, some economists argued that the change in the interest rates that comes about due to deficit spending implied in the demand and supply of financial capital graph would not occur. A simple reason was that the government was stepping in to invest when private firms were not. Using a graph, explain how the use by government in investment offsets the deficit demand.
Describe how a plan for reducing the government deficit might affect a college student, a young professional, and a middle-income family.
In the late 1990s, the U.S. government moved from a budget deficit to a budget surplus and the trade deficit in the U.S. economy grew substantially. Using the national saving and investment identity, what can you say about the direction in which saving on/or investment must have changed in this economy?
Assume there is no discretionary increase in government spending. Explain how an improving economy will affect the budget balance and, in turn, investment and the trade balance.
A booming economy can attract financial capital inflows, which promote further growth. However, capital can just as easily flow out of the country, leading to economic recession. Is a country whose economy is booming because It decided to stimulate consumer spending more or less likely to experience capital flight than an economy whose boom Is caused by economic investment expenditure?
What are the two main sides of the national savings and investment identity?
Explain the relationship between a current account deficit or surplus and the flow of funds.
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 45 25 -10 6 40 30 -5 5 35 35 0 4 30 40 5 3 25 45 10 2 20 50 15 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…
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
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…