18 . 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)75525-1565030-1054535-54404003354552305010 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 that, which leads toloanable funds.After the budget deficit occurs, suppose the new equilibrium real interest rate is 5%. 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) toshow the supply curve after the budget deficit.(?Market for Foreign-Currency Exchange10Initial Supply86Supply with Deficit42Demand-20-15-10-55101520QUANTITY OF DOLLARS (Billions)Summarize the effects of a budget deficit by filling in the following table.Real Interest RateReal Exchange RateTrade BalanceEffects of a Budget DeficitREAL EXCHANGE 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 Funds10Demand8SupplyEquilibrium20406080100QUANTITY 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 vou derived in the previous graph.(?Net Capital Outflow10NCO86Eqm. NCO4-20-15-10-55101520NET CAPITAL OUTFLOW (Billions of dollars)REAL INTEREST RATEREAL INTEREST RATE

The stockpile of loanable assets is the public reserve funds of the economy and the interest for…

Answered: Consider a hypothetical open economy.…

Practical Management Science

6th Edition

ISBN:9781337406659

Author:WINSTON, Wayne L.

Publisher:WINSTON, Wayne L.

Chapter2: Introduction To Spreadsheet Modeling

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Problem 20P: Julie James is opening a lemonade stand. She believes the fixed cost per week of running the stand...

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18 . 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	55	25	-15
6	50	30	-10
5	45	35	-5
4	40	40	0
3	35	45	5
2	30	50	10

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 5%. 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 Exchange
10
Initial Supply
8
6
Supply with Deficit
4
2
Demand
-20
-15
-10
-5
5
10
15
20
QUANTITY OF DOLLARS (Billions)
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
REAL EXCHANGE 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
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 vou derived in the previous graph.
(?
Net Capital Outflow
10
NCO
8
6
Eqm. NCO
4
-20
-15
-10
-5
5
10
15
20
NET CAPITAL OUTFLOW (Billions of dollars)
REAL INTEREST RATE
REAL INTEREST RATE

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