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	45	25	-10
6	40	30	-5
5	35	35	0
4	30	40	5
3	25	45	10
2	20	50	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 (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 10 O Demand 6 Supply REAL INTEREST RATE -+ 4 Equilibrium 2 0 0 20 40 60 80 100 QUANTITY OF LOANABLE FUNDSNet Capital Outflow 10 A NCO 6 Egm. NCO REAL INTEREST RATE A 2 -20 -15 -10 -5 0 5 10 15 20 NET CAPITAL OUTFLOW (Billions of dollars)a trade deficit balanced trade a trade surplusnational saving will increase national saving will decrease e domestic investment will increase domestic investment will decrease DLan increase in the supply of a decrease in the supply of an increase in the demand for a decrease in the demand forMarket for Foreign-Currency Exchange 10 A 8 Initial Supply 6 Supply with Deficit REAL EXCHANGE RATE A 2 Demand -20 -15 -10 -5 0 5 10 15 20 QUANTITY OF DOLLARS (Billions)