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 currently experiencing a balanced government budget.Real Interest RateNational SavingDomestic InvestmentNet Capital Outflow(Percent)(Billions of dollars)(Billions of dollars)(Billions of dollars)76030-1065540-555050044560534070102358015 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) toshow the supply curve after the budget deficit.Market for Foreign-Currency Exchange10Initial Supply86Supply with Deficit4Demand-20-15-10-55101520QUANTITY OF DOLLARS (Billions)Summarize the effects of a budget deficit by filling in the following table.Real Interest RateReal Exchange RateTrade BalanceEffects of a Budget DeficitREAL EXCHANGE RATE

A government budget deficit takes place when a central authority's prices exceed its revenues within…

Answered: budget deficit

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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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	National Saving	Domestic Investment	Net Capital Outflow
(Percent)	(Billions of dollars)	(Billions of dollars)	(Billions of dollars)
7	60	30	-10
6	55	40	-5
5	50	50	0
4	45	60	5
3	40	70	10
2	35	80	15

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 Foreign-Currency Exchange
10
Initial Supply
8
6
Supply with Deficit
4
Demand
-20
-15
-10
-5
5
10
15
20
QUANTITY OF DOLLARS (Billions)
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

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