3. Effects of a government budget deficitSuppose a hypothetical open economy uses the U.S. dollar as currency. The table below presents data describing the relationship between differentreal interest rates and this economy's levels of national saving, domestic investment, and net capital outflow. Assume that the economy is currentlyoperating under a balanced government budget.Real Interest Rate(Percent)765REAL INTEREST RATE10804320National Saving(Billions of dollars)60Given 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.205550454035Domestic Investment(Billions of dollars)303540Market for Loanable Funds4060QUANTITY OF LOANABLE FUNDS80455055Net Capital Outflow(Billions of dollars)-15-10-505100ODemand-0Supply10.Equilibrium(?) 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.REAL INTEREST RATE-20EXCHANGE RATENet Capital Outflow-6-1510-15 -10051016NET CAPITAL OUTFLOW (Billions of dollars)82-100Effects of a Budget DeficitBecause 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 thattoloanable funds.10Market for Foreign-Currency ExchangeAfter 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.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.0-5010QUANTITY OF DOLLARS (Billions)20Demand5NCO15+20Eqm, NCOSummarize the effects of a budget deficit by filling in the following table.(?AInitial Supply1Supply with DeficitY which leads(?)Real Interest Rate Real Exchange Rate Trade Balance

Balance trade:-Balance of trade known as the exchange balance, refers to the difference between the…

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) 7 6 5 4 3 2 REAL INTEREST RATE 10 8 2 0 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. (? 0 National Saving (Billions of dollars) 60 55 50 45 40 35 20 Domestic Investment (Billions of dollars) 30 35 40 45 Market for Loanable Funds 40 60 QUANTITY OF LOANABLE FUNDS 50 55 80 Net Capital Outflow (Billions of dollars) -15 100 Demand -0- Supply -10 -5 0 Equilibrium 5 10

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) 7 6 5 4 3 2 REAL INTEREST RATE 10 8 2 0 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. (? 0 National Saving (Billions of dollars) 60 55 50 45 40 35 20 Domestic Investment (Billions of dollars) 30 35 40 45 Market for Loanable Funds 40 60 QUANTITY OF LOANABLE FUNDS 50 55 80 Net Capital Outflow (Billions of dollars) -15 100 Demand -0- Supply -10 -5 0 Equilibrium 5 10

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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4. Deficits in new classical economics Felix lives in the fictional country of Lindelof, which raises government revenue by taxing everyone the same amount. The government of Lindelof has just implemented a tax cut that reduces annual taxes by $3,500 per person. However, government spending has not changed, nor is it likely change in the future. The tax cut has raised Felix's income by $3,500. If Felix acts according to the prediction of new classical economics (and doesn't plan to leave Lindelof), his consumption is likely to increase by Suppose that instead of cutting taxes while keeping its spending the same, the government did the opposite: it increased its spending by $3,500 per person while keeping taxes the same. If everyone in Lindelof acted like Felix, the likely increase in aggregate demand would be per person.
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 40 30 -20 6 35 35 -15 5 30 40 -10 4 25 45 -5 3 20 50 0 2 15 55 5 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. Because of the relationship between net capital outflow and net…
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Suppose that for every 1 percentage point increase (decrease) in GDP growth, automatic stabilizers (i) increase (decrease) tax revenues revenues by $90 billion and (ii) decrease (increase) transfer payments by $30 billion. Using this information, complete the table.
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10. Agreements and disagreements among economists regarding fiscalpolicy Consider a hypothetical economy in which households spend $0.75 of each additional dollar of their after-tax income. The expenditure multiplier for this economy is Suppose that this economy is experiencing a recession. The government would like to stimulate aggregate demand and is deciding whether it should increase its spending by $1 billion or reduce income tax by $1 billion. Assume other things remain constant, and the marginal propensity to consume remains at 0.75. Before any multiplier effect takes place, a $1 billion increase in government spending will increase the aggregate demand by s $1 billion reduction in income tax will increase the aggregate demand by billion, while a billion. Now consider the effect of each fiscal policy after the multiplier effect is complete. A $1 billion increase in government spending will result in a total increase of aggregate demand by $ billion, whereas a $1 billion…
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 -10 6 50 35 -5 5 45 45 0 4 40 55 5 3 35 65 10 2 30 75 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.