al Saving of dollars) 55 50 45 40 Domestic Investment (Billions of dollars) 30 40 50 60 70 Net Capital Outflow (Billions of dollars) -15 -10 -5 35 5 30 80 10 table, use the blue points (circle symbol) to plot the demand for loanable funds. Next, use th loanable funds. Finally, use the black point (cross symbol) to indicate the equilibrium in this m e Funds Demand Supply Equilibrium 70
al Saving of dollars) 55 50 45 40 Domestic Investment (Billions of dollars) 30 40 50 60 70 Net Capital Outflow (Billions of dollars) -15 -10 -5 35 5 30 80 10 table, use the blue points (circle symbol) to plot the demand for loanable funds. Next, use th loanable funds. Finally, use the black point (cross symbol) to indicate the equilibrium in this m e Funds Demand Supply Equilibrium 70
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
Related questions
Question
Transcribed Image Text:3. 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
(Percent)
7
National Saving
(Billions of dollars)
55
Domestic Investment
(Billions of dollars)
Net Capital Outflow
(Billions of dollars)
30
-15
6
50
40
-10
5
45
50
-5
4
40
60
0
3
35
70
5
2
30
80
10
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
O
Demand
8
O
Supply
*+
Equilibrium
20
40
80
60
QUANTITY OF LOANABLE FUNDS
REAL INTEREST RATE
6
2
0
0
100
Transcribed Image Text: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 Outflow
10
A
8
NCO
+
6
Eqm. NCO
REAL INTEREST RATE
-10
0
5
10
15
NET CAPITAL OUTFLOW (Billions of dollars)
6
-20
-15
-10
-5
0
5
10
15
20
NET CAPITAL OUTFLOW (Billions of dollars)
Because of the relationship between net capital outflow and net exports, the level of het capital outflow at the equilibrium real interest rate implies
that the economy is experiencing
▼
which leads to
Now, suppose the government is experiencing a budget deficit. This means that
loanable funds.
After 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.
REAL INTEREST R
-20 -15
5
och
20
Eqm. NCO
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 3 steps with 2 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.Recommended textbooks for you
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
Principles of Economics (MindTap Course List)
Economics
ISBN:
9781305585126
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning
Managerial Economics: A Problem Solving Approach
Economics
ISBN:
9781337106665
Author:
Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:
Cengage Learning
Managerial Economics & Business Strategy (Mcgraw-…
Economics
ISBN:
9781259290619
Author:
Michael Baye, Jeff Prince
Publisher:
McGraw-Hill Education