Market for Foreign-Currency Exchange 10 A 8 Initial Supply 6 Supply with Deficit REAL EXCHANGE RATE 4 2 Demand -20 -15 -10 -5 0 5 10 15 20 QUANTITY OF DOLLARS (Billions)Increases Summarize the effects of a budget g in the following table. Decreases R Rate Real Exchange Rate Trade Balance Effects of a 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 Rate National Saving Domestic Investment Net Capital Outflow (Percent) (Billions of dollars) (Billions of dollars) (Billions of dollars) 7 50 20 -10 6 45 30 -5 5 40 40 0 4 3 5 50 5 3 30 60 10 2 25 70 15 ? Market for Loanable Funds 10 O 8 Demand 6 Supply REAL INTEREST RATE 4 Equilibrium 2 0 0 20 40 60 80 100 QUANTITY OF LOANABLE FUNDSREAL INTEREST RATE Net Capital Outflow 1U -2C| -15 -1C| -5 D 5 1D 15 NET CAPITAL OUTFLOW (Billions of dollars) 20 Now, suppose the government is experiencing a budget deficit. This means that V , which leads to Y loanable funds. national saving will increase After the budget deficit occurs, suppose the new equilibrium real interest rate is national saving will decrease emand curve in the foreign- currency exchange market. domestic investment will increase domestic investment will decrease Use the green line (triangle symbol) to show the supply curve in this market be' -urp.'e line (diamond symbol) to show the supply curve after the budget deficit. Now, suppose the government is experiencing a budget deficit. This means that Y , which leads to V loanable funds. an increase in the supply of ppose the new equilibrium real interest rate is 7%. The following graph shows the demand curve in the foreign- a decrease in the supplyr of an increase in the demand for 1') to show the supply curve in this market before the budget decit. Then use the purple i'r'ne (diamond symbol) to a decrease in the demand for udget deficit. 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