Part 3

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. Market for Foreign-Currency Exchange 10 A 8 Initial Supply 6 Supply with Deficit REAL EXCHANGE RATE Demand -20 -15 -10 -5 0 5 10 15 20 QUANTITY OF DOLLARS (Billions)