1. Consider the U.S. economy depicted below, which is initially in a long-run equilibrium. a) Suppose the government decides to decrease government expenditures and taxes by the same amount. Reflect the effects of this "balanced-budget" change on the diagram below. What happens to the U.S. real interest rate? Does the U.S. dollar appreciate or depreciate? Explain. r S I+NCO LF 3 & NCO NCO NX NX b) From the initial to the new long-run equilibrium, explain what happens to U.S. output, consumption, investment, government expenditure, and net exports? Briefly explain.

1. Consider the U.S. economy depicted below, which is initially in a long-run equilibrium. a) Suppose the government decides to decrease government expenditures and taxes by the same amount. Reflect the effects of this "balanced-budget" change on the diagram below. What happens to the U.S. real interest rate? Does the U.S. dollar appreciate or depreciate? Explain. r S I+NCO LF 3 & NCO NCO NX NX b) From the initial to the new long-run equilibrium, explain what happens to U.S. output, consumption, investment, government expenditure, and net exports? Briefly explain.

Principles of Economics (MindTap Course List)

8th Edition

ISBN:9781305585126

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter34: The Influence Of Monetary And Fiscal Policy On Aggregate Demand

Section: Chapter Questions

Problem 4CQQ

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