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 55 25 -10 6 50 35 -5 5 45 45 0 4 40 55 5 3 35 65 10 2 30 75 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 (trade balance, defict, surplus) . Now, suppose the government is experiencing a budget deficit. This means that (national savings increase or decrease, domestic investments increase or decrease) , which leads to (increase or decrease in supply , increase or decrease in demand) loanable funds.
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 55 25 -10 6 50 35 -5 5 45 45 0 4 40 55 5 3 35 65 10 2 30 75 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 (trade balance, defict, surplus) . Now, suppose the government is experiencing a budget deficit. This means that (national savings increase or decrease, domestic investments increase or decrease) , which leads to (increase or decrease in supply , increase or decrease in demand) loanable funds.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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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 | 55 | 25 | -10 |
| 6 | 50 | 35 | -5 |
| 5 | 45 | 45 | 0 |
| 4 | 40 | 55 | 5 |
| 3 | 35 | 65 | 10 |
| 2 | 30 | 75 | 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 (trade balance, defict, surplus) .
Now, suppose the government is experiencing a budget deficit. This means that (national savings increase or decrease, domestic investments increase or decrease) , which leads to (increase or decrease in supply , increase or decrease in demand ) loanable funds.
After the budget deficit occurs, suppose the new equilibrium real interest rate is 7%. The following graph shows the demand curve in the foreign-currency exchange market.
Summarize the effects of a budget deficit by filling in the following table.
|
|
Real Interest Rate
|
Real Exchange Rate
|
Trade Balance
|
|---|---|---|---|
| Effects of a Budget Deficit | increase, decrease | increase, decrease | surplus, deficit |
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