Answered: Consider a hypothetical open economy.…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Real Interest Rate	National Saving	Domestic Investment	Net Capital Outflow
7	45	25	-10
6	40	30	-5
5	35	35	0
4	30	40	5
3	25	45	10
2	20	50	15

3. Effects of a government budget deficit

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.

On the following graph, plot the relationship between the real interest rate and net capital outflow by using the green points (triangle symbol) to plot the points from the initial data table. Then use the black point (X symbol) to indicate the level of net capital outflow at the equilibrium real interest rate you derived in the previous graph.

Because of the relationship between net capital outflow and net exports, the level of net capital outflow at the equilibrium real interest rate implies that the economy is experiencing ________________ .

Now, suppose the government is experiencing a budget deficit. This means that ________________ , which leads to ____________ loanable funds.

After the budget deficit occurs, suppose the new equilibrium real interest rate is 6%. 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.

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
Demand
Supply
Equilibrium
20
40
60
80
100
QUANTITY OF LOANABLE FUNDS
On the following graph, plot the relationship between the real interest rate and net capital outflow by using the green points (triangle symbol) to plot
the points from the initial data table. Then use the black point (X symbol) to indicate the level of net capital outfilow at the equilibrium real interest
rate you derived in the previous graph.
Net Capital Outflow
10
NCO
Egm. NCO
-20
-15
-10 -5 0 5 10
15
20
NET CAPITAL OUTFLOW (Billions of dollars)
REAL INTEREST RATE
REAL INTEREST RATE

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