ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN: 9780190931919
Author: NEWNAN
Publisher: Oxford University Press
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3. 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 60 30 -10
6 55 40 -5
5 50 50 0
4 45 60 5
3 40 70 10
2 35 80 15
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
Initial Supply
8
6
Supply with Deficit
4
Demand
-20
-15
-10
-5
5
10
15
20
QUANTITY OF DOLLARS (Billions)
Summarize the effects of a budget deficit by filling in the following table.
Real Interest Rate
Real Exchange Rate
Trade Balance
Effects of a Budget Deficit
REAL EXCHANGE RATE
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Transcribed Image Text: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 Initial Supply 8 6 Supply with Deficit 4 Demand -20 -15 -10 -5 5 10 15 20 QUANTITY OF DOLLARS (Billions) Summarize the effects of a budget deficit by filling in the following table. Real Interest Rate Real Exchange Rate Trade Balance Effects of a Budget Deficit REAL EXCHANGE RATE
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