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. REAL EXCHANGE RATE -20 -15 Market for Foreign-Currency Exchange -10 -5 10 8 Effects of a Budget Deficit 6 2 0 10 0 QUANTITY OF DOLLARS (Billions) 5 Demand 15 20 Summarize the effects of a budget deficit by filling in the following table. Initial Supply Supply with Deficit (?) Real Interest Rate Real Exchange Rate Trade Balance

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. REAL EXCHANGE RATE -20 -15 Market for Foreign-Currency Exchange -10 -5 10 8 Effects of a Budget Deficit 6 2 0 10 0 QUANTITY OF DOLLARS (Billions) 5 Demand 15 20 Summarize the effects of a budget deficit by filling in the following table. Initial Supply Supply with Deficit (?) Real Interest Rate Real Exchange Rate Trade Balance

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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