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 RateNational SavingDomestic InvestmentNet Capital Outflow(Percent)(Billions of dollars)(Billions of dollars)(Billions of dollars)74030-2063535-1553040-1042545-5320500215555 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 FundsDemandSupplyEquilibrium0204060801001086420REAL INTEREST RATEQUANTITY 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. Net Capital OutflowNCOEqm. NCO-20-15-10-5051015201086420REAL INTEREST RATENET 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. 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.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. Market for Foreign-Currency ExchangeInitial SupplySupply with Deficit-20-15-10-5051015201086420REAL EXCHANGE RATEQUANTITY OF DOLLARS (Billions)Demand Summarize the effects of a budget deficit by filling in the following table. Real Interest RateReal Exchange RateTrade BalanceEffects of a Budget Deficit Market for Foreign-Currency ExchangeMarket for Loanable Funds1010Initial SupplyDemand886Supply with DeficitSupplyEquilibrium22Demand+-20-15-10-510152020406080100QUANTITY OF DOLLARS (Billions)QUANTITY OF LOANABLE FUNDSREAL INTEREST RATEREAL EXCHANGE RATE Market for Foreign-Currency Exchange10Initial SupplySupply with Deficit4Demand-20-15-10-5101520QUANTITY OF DOLLARS (Billions)REAL EXCHANGE RATE

Question

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 RateNational SavingDomestic InvestmentNet Capital Outflow(Percent)(Billions of dollars)(Billions of dollars)(Billions of dollars)74030-2063535-1553040-1042545-5320500215555 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 FundsDemandSupplyEquilibrium0204060801001086420REAL INTEREST RATEQUANTITY 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. Net Capital OutflowNCOEqm. NCO-20-15-10-5051015201086420REAL INTEREST RATENET 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. 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.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. Market for Foreign-Currency ExchangeInitial SupplySupply with Deficit-20-15-10-5051015201086420REAL EXCHANGE RATEQUANTITY OF DOLLARS (Billions)Demand Summarize the effects of a budget deficit by filling in the following table. Real Interest RateReal Exchange RateTrade BalanceEffects of a Budget Deficit Market for Foreign-Currency ExchangeMarket for Loanable Funds1010Initial SupplyDemand886Supply with DeficitSupplyEquilibrium22Demand+-20-15-10-510152020406080100QUANTITY OF DOLLARS (Billions)QUANTITY OF LOANABLE FUNDSREAL INTEREST RATEREAL EXCHANGE RATE Market for Foreign-Currency Exchange10Initial SupplySupply with Deficit4Demand-20-15-10-5101520QUANTITY OF DOLLARS (Billions)REAL EXCHANGE RATE

Accepted Answer

A balanced budget (particularly that of an organization) is a budget wherein salaries are identical…

Real Interest Rate	National Saving	Domestic Investment	Net Capital Outflow
(Percent)	(Billions of dollars)	(Billions of dollars)	(Billions of dollars)
7	40	30	-20
6	35	35	-15
5	30	40	-10
4	25	45	-5
3	20	50	0
2	15	55	5