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 45 25 -10 6 40 30 -5 5 35 35 0 4 30 40 5 3 25 45 10 2 20 50 15

Suppose that the government deficit is 20, interest on the government debt is 15, taxes are 55, government expenditures are 50, consumption expenditures are 65, ne factor payments are 25, the current account surplus is - 10, and national saving is 40. Calculate the following (not necessarily in the order given): a. Private disposable income = b. Transfers from the government to the private sector = c. Gross national product d. Gross domestic product : e. The government surplus = f. Net exports %D g. Investment expenditures =

5. Capital flight The graphs below depict the loanable funds market and the relationship between real interest rates and the level of net capital outflow (NCO) calculated in terms of the Mexican peso. REAL INTEREST RATE (Percent) The Market for Loanable Funds in Mexico 1 4 6 7 LOANABLE FUNDS (Billions of pesos) Initial state After capital flight 3 REAL EXCHANGE RATE (Dollars per peso) Supply Demand Complete the first row of the table to reflect the state of the markets in Mexico. Real Interest Rate Net Capital Outflow (NCO) (Percent) (Billions of pesos) 8 REAL INTEREST RATE (Percent) Supply Effects of capital flight The Market for Foreign-Currency Exchange QUANTITY OF PESOS Suppose now that a sudden bout of political turmoil in Mexico causes world financial markets to become uneasy. Because investors now see Mexico as unstable, they decide to pull a portion of their assets out of Mexico and put them into more stable economies. This unexpected shock to the demand for assets in Mexico is…

If a country is experiencing a budget deficit and the government reduced spending, resulting in a balanced budget. How a country’s shift from budget deficit to balanced budget would affect its investments, economic growth, net capital outflow and currency exchange rate? Use diagrams where necessary?

Consider an economy described by the following equations: Y=C+I+G+NX Y=10,000 G=3,500 T=2,300 C-600 + 4/5(Y-T) 1=1,100-60r NX-1,800-670€ r.-8. In this economy, private saving = rate public saving investment = national saving the trade balance and the equilibrium exchange. (please enter your answers in numerical value without any dollar sign, comma, or a decimal place.)

4. Analyzing the effects of a trade deficit You have just been hired by the U.S. government to analyze the following scenario. Suppose the U.S. agricultural industry is concerned about of fruit and vegetable imports to the United States, a practice that hurts domestic producers. Lobbyists claim that implementing a tariff on imp would shrink the size of the trade deficit. The following exercise will help you to analyze this claim. The following graph shows the demand and supply of U.S. dollars in a model of the foreign-currency exchange market. Shift the demand curve, the supply curve, or both to show what would happen if the government decided to implement the tariff. REAL EXCHANGE RATE (Units of foreign currency per dollar) Supply QUANTITY OF DOLLARS Demand Demand 0 Supply

Consider two large open economies - U.S. and Europe.  If expansionary fiscal policy is adopted in Europe, what happens in the U.S? net capital outflow rises, the real interest rate falls and investment spending rises. net capital outflow falls, the real interest rate rises and investment spending rises. net capital outflow falls, the real interest rate rises and investment spending falls.  net capital outflow rises, the real interest rate rises and investment spending falls. In a large open economy, if political instability abroad lowers the net capital outflow function, then the real interest rate: rises, while the real exchange rate falls and net exports rise. falls, while the real exchange rate rises and net exports fall.  rises, while the real exchange rate rises and net exports fall. falls, while the real exchange rate rises and net exports rise. Political instability in the U.S. Political instability in the U.S.

Saving-Investment Diagram Real Interest Rate, r(percent Saving Curve Investment Curve DE F GH Desired Saving and Investment (in billions of dollars) Based on the Saving-Investment Diagram, if the world real interest rate is indicated by C, then the difference between values H and D measures the net capital outflow the difference between values H and F measures the trade deficit the difference between values H and D measures the trade deficit the domestic real interest rate is indicated by B none of the above

Graphs and questions in images. Thank you!

If the economy enters a recessionary gap, then incomes in the economy decrease, which reduce income tax revenues earned by the government. When the economy enters a recession, unemployment compensation increases due to an increase in jobless claims. In other words, the government budget deficit increases. Begin with the open economy financial market in equilibrium. What will happen to the U.S. savings and net capital inflow function if the U.S. budget deficit increases? What will to the investment function if the U.S. budget deficit increases? What will happen to the real rate of interest if the U.S. budget deficit increases? What will happen to the quantity saved/invested if the U.S. budget deficit increases? Given the change in the level of savings, what would happen to the level of consumption?