3. Effects of a government budget deficit Suppose a hypothetical open economy uses the U.S. dollar as currency. The table below presents data describing the relationship between different real interest rates and this economy's levels of national saving, domestic investment, and net capital outflow. Assume that the economy is currently operating under a balanced government budget. Real Interest Rate (Percent) REAL INTEREST RATE 10 00 2 0 7 6 5 4 0 3 2 National Saving (Billions of dollars) 65 60 55 50 Given the information in the table above, 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. ? 45 40 20 Market for Loanable Funds 40 80 60 QUANTITY OF LOANABLE FUNDS Domestic Investment (Billions of dollars) 15 25 35 45 55 65 100 Net Capital Outflow (Billions of dollars) -10 -5 0 Demand Supply + 5 10 15 Equilibrium

3. Effects of a government budget deficit Suppose a hypothetical open economy uses the U.S. dollar as currency. The table below presents data describing the relationship between different real interest rates and this economy's levels of national saving, domestic investment, and net capital outflow. Assume that the economy is currently operating under a balanced government budget. Real Interest Rate (Percent) REAL INTEREST RATE 10 00 2 0 7 6 5 4 0 3 2 National Saving (Billions of dollars) 65 60 55 50 Given the information in the table above, 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. ? 45 40 20 Market for Loanable Funds 40 80 60 QUANTITY OF LOANABLE FUNDS Domestic Investment (Billions of dollars) 15 25 35 45 55 65 100 Net Capital Outflow (Billions of dollars) -10 -5 0 Demand Supply + 5 10 15 Equilibrium

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

Based on the national saving and investment identity, what are the three ways the macroeconomy might react to greater government budget deficits?
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.
Imagine an economy in which Ricardian equivalence holds. This economy has a budget deficit of 50, a trade deficit of 20, private savings of 130, and investment of 100. If the budget deficit rises to 70, how are the other terms in the national saving and investment identity affected?
Explain how a shift from a government budget deficit to a budget surplus might affect the exchange rate.
Explain whether or not you agree with the premise of the Ricardian equivalence theory that rational people might reason: Well, a higher budget deficit (surplus) means that Im just going to owe more (less) taxes In the future to pay off all that government borrowing, so Ill start saving (spending) now. Why or why not?
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?
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.