3. 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 currentlyexperiencing a balanced government budget.Real Interest Rate(Percent)7National Saving(Billions of dollars)55Domestic Investment(Billions of dollars)Net Capital Outflow(Billions of dollars)30-1565040-1054550-54406003357052308010Given 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 Funds10ODemand8OSupply*+Equilibrium20408060QUANTITY OF LOANABLE FUNDSREAL INTEREST RATE6200100 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.Net Capital Outflow10A8NCO+6Eqm. NCOREAL INTEREST RATE-10051015NET CAPITAL OUTFLOW (Billions of dollars)6-20-15-10-505101520NET 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 impliesthat the economy is experiencing▼which leads toNow, suppose the government is experiencing a budget deficit. This means thatloanable 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 -155och20Eqm. NCO

Below table represents the computation of investment + net capital outflow Real interest rate…

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

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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6. An increase in capital inflows in South Africa will result in a (n) _________foreign currency and a (n)_______the South African Rand in the foreign exchange market. (4 marks)A Increase in the demand for; increase in the supply ofB Increase in the supply of; increase in the demand forC Shortage of; surplus ofD Surplus of; shortage of
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Choose all true statements on the saving, investment and loanable funds market in a closed economy. (choose 2) a. If the government opens up a budget deficit by cutting labor income tax, and workers save full proceeds of the tax cut, interest rate and investment do not change. b. If the government opens up a budget deficit by cutting labor income tax, and workers spend additional income saved from the tax cut, national saving falls and interest rate rises. O c. An increase in corporate income tax will lead to a higher equilibrium interest rate. d. Tax incentives for saving will lead to higher interest rates and thus lower investments.
20- Balance of payments (BOP) is measuring all international economic transactions between the residents of a country and foreign residents. Please expand the statement by discussing what economic activities are measured by BOP? And why it always be balanced?
5. In the loanable funds model, the country’s stock of “investment” comes from: Production firms renting equipment High real interest rates Rental firms purchasing new capital to rent out to production firms Foreign firms
rates activity demand and supply for loans - Compatibility Mode Word Brianic References Mailings Review View Help Picture Format A A Aa- A 市。 ३- AaBbCcD AaBbCcDc AABBC AaBbCcl x A- A- I Normal I No Spac. Heading 1 Heading 2 nt Paragraph Styles 3 4. I 6 supply of loanable funds, and the downward-sloping blue line represents the demand for loanable funds. INTEREST RATE IPercent) Supply Demand OTY OF LOANAHLEFUNDSTBons of dollars) is the source of the supply of loanable funds. As the interest rate falls, the quantity of loanable funds supplied Suppose the interest rate is 4%. In this case, the quantity of loanable funds supplied is of loanable funds. This would encourage lenders to than the quantity of loans demanded, resulting in a the interest rates they charge, thereby the quantity of loanable funds supplied and the quantity of loanable funds demanded, moving the market toward the equilibrium intere rate of 1 TCL10SE DISPLAY GREATNESS
9. Consider savings-investment diagrams assuming that there are two countries in the world, A and B. Initially, both countries are identical, i.e., they have the same supply of savings and demand for investment. Therefore, even as open economies, they both have balanced current accounts, i.e., neither has a deficit or surplus. Now assume that in country A, the government increases the budget deficit, shifting the supply of savings to the left. If all other curves (A s investment demand, B s savings supply, B s investment demand) stay the same, what will the effect of the increase in A's budget deficit? a. Country B will have a CA surplus. b. Country A will have a KFA deficit. c. Investment in country B will increase. d. The world real interest rate will fall.
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