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.Because of the relationship between net capital outflow and net exports, the level of net capital outflow at the equilibrium real interest rate implies that the economy is experiencing___________ .Now, suppose the government is experiencing a budget deficit. This means that _________, which leads to ___________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. ### Understanding the Market for Loanable Funds**Data Table:**| Real Interest Rate (Percent) | National Saving (Billions of dollars) | Domestic Investment (Billions of dollars) | Net Capital Outflow (Billions of dollars) ||------------------------------|---------------------------------------|-------------------------------------------|-------------------------------------------|| 7 | 65 | 30 | -10 || 6 | 60 | 35 | -5 || 5 | 55 | 40 | 0 || 4 | 50 | 45 | 5 || 3 | 45 | 50 | 10 || 2 | 40 | 55 | 15 |**Instructions:**Using the information above, plot the demand for loanable funds with blue points (circle symbol) and the supply with orange points (square symbol). The equilibrium is represented by a black point (cross symbol).**Graph Explanation:**- **Axes:** The x-axis represents the amount of loanable funds in billions of dollars, while the y-axis shows the real interest rate in percent.- **Data Points:** - **Demand:** Plotted using blue circles. - **Supply:** Plotted using orange squares.- **Equilibrium:** Indicated by a black cross where supply and demand meet.### Insights into Loanable Funds:- As the real interest rate decreases from 7% to 2%, national saving decreases, and domestic investment increases.- There is a transition from a negative to a positive net capital outflow, indicating changes in capital movement across borders relative to the interest rate.- The intersection of the demand and supply curves defines the equilibrium interest rate and the equilibrium quantity of loanable funds in the market. This model helps illustrate how interest rates are determined in financial markets and how they influence the balance between savings and investments. **Transcription for Educational Website:**---**Homework (Ch 19): Understanding the Relationship Between Real Interest Rate and Net Capital Outflow**In this exercise, you’ll plot the relationship between the real interest rate and net capital outflow. Use the green points (triangle symbol) to represent the data points from the initial data table. Mark the level of net capital outflow at the equilibrium real interest rate using the black point (X symbol), as determined from the previous graph analysis.**Graph Explanation:**- **Title:** Net Capital Outflow- **X-Axis:** Net Capital Outflow (Billions of dollars), ranging from -30 to 20.- **Y-Axis:** Real Interest Rate (%), ranging from 0 to 10.- There are two main sets of data points: - **NCO (Green Triangles):** These points indicate the net capital outflow at various real interest rates. - **Equilibrium NCO (Black X):** This point marks the net capital outflow corresponding to the equilibrium real interest rate.The graph illustrates the correlation between the real interest rate and net capital outflow. As part of this analysis, you are asked to interpret these relationships and what they imply for the economy.**Economic Context Explanation:**- Because of the observed relationship between net capital outflow and net exports, the equilibrium real interest rate’s net capital outflow level provides insights into the state of the economy.- Currently, experiencing a budget deficit indicates a particular economic condition, emphasizing the importance of understanding these dynamics for policy and decision-making.---This task will reinforce your understanding of macroeconomic principles, particularly the interaction between interest rates and capital flows.

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Answered: Consider a hypothetical open economy.…

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC