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3. Effects of a government budget deficit Suppose a hypothetical open economy uses the U.S. dollar as currency. The table below presents data describing the

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3. Effects of a government budget deficit Suppose a hypothetical open economy uses the U.S. dollar as currency. The table below presents data describing the relationship between different real interest rates and this economy's levels of national saving, domestic investment, and net capital outflow. Assume that the economy is currently operating under a balanced government budget. Real Interest Domestic Net Capital Rate National Saving Investment Outflow (Percent) (Billions of (Billions of (Billions of dollars) dollars) dollars) 7 50 25 -15 45 35 -10 UT 40 45 -5 35 55 0 30 65 UT W N 25 75 10 Given the information in the table above, 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 Funds 0 O Demand O- Supply Equilibrium REAL INTEREST RATE 2 0 20 40 60 80 100 QUANTITY OF LOANABLE FUNDSOn the following 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 (X symbol) to indicate the level of net capital outflow at the equilibrium real interest rate you derived in the previous graph. ?) Net Capital Outflow 10 8 NCO .+ Eqm. NCO REAL INTEREST RATE 2 -20 -15 -10 -5 0 10 15 20 NET CAPITAL OUTFLOW (Billions of dollars) 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.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 the 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 interest rate you derived in the previous graph. (? Net Capital Outflow 10 6 plot points A NCO Eqm. NCO REAL INTEREST RATE -20 -15 -10 -5 0 10 15 20 1. A trade surplus NET CAPITAL OUTFLOW (Billions of dollars) A trade 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 Balance experiencing 1 2. National saving will increase Now, suppose the government is experiencing a budget deficit. This means National will decrease that 2 , which leads to 3 Domestic will increase loanable funds. Domestic will decrease After the budget deficit occurs, suppose the new equilibrium real interest rate is 7%. The 3. An increase of supply following graph shows the demand curve in the foreign-currency exchange market. A decrease in supply An increase of demand A decrease of demandOn the following 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 (X symbol) to indicate the level of net capital outflow at the equilibrium real interest rate you derived in the previous graph. Net Capital Outflow 6 plotted 10 A 8 NCO Egm. NCO REAL INTEREST RATE -20 -15 -10 -5 10 15 20 NET CAPITAL OUTFLOW (Billions of dollars) 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

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