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 dollar. Assume that the economy is currently experiencing a balanced government budget.   NOTE:   follow RED ARROWS for the order of the questions (IT IS PART OF THE SAME QUESTION!!!!!)   NOTE: HERE ARE THE OPTIONS FOR THE BLANKS: 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 _____ (a trade deficit OR balanced trade OR a trade surplus) Now, suppose the government is experiencing a budget deficit. This means that ______ (national saving will increase OR national saving will decrease OR domestic investment will increase OR domestic investment will decrease),  which leads to ______ (an increase in the supply of OR a decrease in the supply of OR an increase in the demand for OR a decrease in the demand for) loanable funds Effects of a Budget Deficit: Options for real interest rate (increases OR decreases) Options for real exchange rate (increases OR decreases) Options for trade balance (surplus OR deficit)

ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
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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 dollar. Assume that the economy is currently experiencing a balanced government budget.
 
NOTE:
 
follow RED ARROWS for the order of the questions (IT IS PART OF THE SAME QUESTION!!!!!)
 
NOTE:

HERE ARE THE OPTIONS FOR THE BLANKS:

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 _____ (a trade deficit OR balanced trade OR a trade surplus)

Now, suppose the government is experiencing a budget deficit. This means that ______ (national saving will increase OR national saving will decrease OR domestic investment will increase OR domestic investment will decrease),  which leads to ______ (an increase in the supply of OR a decrease in the supply of OR an increase in the demand for OR a decrease in the demand for) loanable funds

Effects of a Budget Deficit:

Options for real interest rate (increases OR decreases)

Options for real exchange rate (increases OR decreases)

Options for trade balance (surplus OR deficit)

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 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.
Market for Forelgn-Currency Exchange
10
Initial Supply
Supply with Deficit
Demand
-20
-15
-10
-5
5
10
15
20
QUANTITY OF DOLLARS (Bilions)
Summarize the effects of a budget deficit by filling in the following table.
Real Interest Rate
Real Exchange Rate
Trade Balance
Effects of a Budget Deficit
REAL EXCHANGE RATE (Percert)
Transcribed Image Text: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 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. Market for Forelgn-Currency Exchange 10 Initial Supply Supply with Deficit Demand -20 -15 -10 -5 5 10 15 20 QUANTITY OF DOLLARS (Bilions) Summarize the effects of a budget deficit by filling in the following table. Real Interest Rate Real Exchange Rate Trade Balance Effects of a Budget Deficit REAL EXCHANGE RATE (Percert)
3. Effects of a government budget deficit
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
Consider a hypothetical open economy. The following table presents data on the relationship between various real interest rates and national saving,
the points from the initial data table. Then use the black point (cross symbol) to indicate the level of net capital outfiow at the equilibrium real interest
domestic investment, and net capital outflow in this economy, where the currency is the dollar. Assume that the economy is currently experiencing a
rate you derived in the previous graph.
balanced government budget.
Real Interest Rate
National Saving
Domestic Investment
Net Capital Outflow
Net Capital Outnow
(Percent)
(Billions of dollars)
(Billions of dollars)
(Billions of dollars)
10
7
60
30
-10
6
55
40
-5
50
50
NCO
45
60
3
40
70
10
Eqm. NCO
2
35
80
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
2
(square symbol) to plot the supply of loanable funds. Finally, use the black point (cross symbol) to indicate the equilibrium in this market.
-20
-15
-10
-5
5
10
15
20
NET CAPITAL OUTFLOW (Bilions of dollars)
Market for Loanable Funde
10
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
Demand
Now, suppose the government is experiencing a budget deficit. This means that
which leads to
v loanable funds.
Supply
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.
Equilibrium
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.
(?
20
40
60
80
100
QUANTITY OF LOANABLE FUNDS (Billions of dollars)
Market for Forelgn-Currency Exchange
10
On the folowing 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 (cross symbol) to indicate the level or net capital outfilow at the equilibrium real interest
Initial Supply
rate you derived in the previous graph.
6
Supply with Deficit
Net Capital Outriow
10
NCO
Demand
REAL EXCHANGE RATE (Percently
Transcribed Image Text:3. Effects of a government budget deficit 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 Consider a hypothetical open economy. The following table presents data on the relationship between various real interest rates and national saving, the points from the initial data table. Then use the black point (cross symbol) to indicate the level of net capital outfiow at the equilibrium real interest domestic investment, and net capital outflow in this economy, where the currency is the dollar. Assume that the economy is currently experiencing a rate you derived in the previous graph. balanced government budget. Real Interest Rate National Saving Domestic Investment Net Capital Outflow Net Capital Outnow (Percent) (Billions of dollars) (Billions of dollars) (Billions of dollars) 10 7 60 30 -10 6 55 40 -5 50 50 NCO 45 60 3 40 70 10 Eqm. NCO 2 35 80 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 2 (square symbol) to plot the supply of loanable funds. Finally, use the black point (cross symbol) to indicate the equilibrium in this market. -20 -15 -10 -5 5 10 15 20 NET CAPITAL OUTFLOW (Bilions of dollars) Market for Loanable Funde 10 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 Demand Now, suppose the government is experiencing a budget deficit. This means that which leads to v loanable funds. Supply 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. Equilibrium 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. (? 20 40 60 80 100 QUANTITY OF LOANABLE FUNDS (Billions of dollars) Market for Forelgn-Currency Exchange 10 On the folowing 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 (cross symbol) to indicate the level or net capital outfilow at the equilibrium real interest Initial Supply rate you derived in the previous graph. 6 Supply with Deficit Net Capital Outriow 10 NCO Demand REAL EXCHANGE RATE (Percently
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