If the economy enters a recessionary gap, then incomes in the economy decrease, which reduce income tax revenues earned by the government. When the economy enters a recession, unemployment compensation increases due to an increase in jobless claims. In other words, the government budget deficit increases. Begin with the open economy financial market in equilibrium. What will happen to the U.S. savings and net capital inflow function if the U.S. budget deficit increases? What will to the investment function if the U.S. budget deficit increases? What will happen to the real rate of interest if the U.S. budget deficit increases? What will happen to the quantity saved/invested if the U.S. budget deficit increases? Given the change in the level of savings, what would happen to the level of consumption?
If the economy enters a recessionary gap, then incomes in the economy decrease, which reduce income tax revenues earned by the government. When the economy enters a recession,
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