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 dollar. Assume that the economy is currently experiencing a balanced government budget. NOTE: follow RED ARROWS for the order of the questions (IT IS PART OF THE SAME QUESTION!!!!!) NOTE:HERE ARE THE OPTIONS FOR THE BLANKS: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 _____ (a trade deficit OR balanced trade OR a trade surplus)Now, suppose the government is experiencing a budget deficit. This means that ______ (national saving will increase OR national saving will decrease OR domestic investment will increase OR domestic investment will decrease), which leads to ______ (an increase in the supply of OR a decrease in the supply of OR an increase in the demand for OR a decrease in the demand for) loanable fundsEffects of a Budget Deficit:Options for real interest rate (increases OR decreases)Options for real exchange rate (increases OR decreases)Options for trade balance (surplus OR deficit) Because of the relationship between net capital outflow and net exports, the level of net capital outflow at the equilibrium real interest rate impliesthat the economy is experiencing.Now, suppose the government is experiencing a budget deficit. This means thatwhich leads toloanable funds.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) toshow the supply curve after the budget deficit.Market for Forelgn-Currency Exchange10Initial SupplySupply with DeficitDemand-20-15-10-55101520QUANTITY OF DOLLARS (Bilions)Summarize the effects of a budget deficit by filling in the following table.Real Interest RateReal Exchange RateTrade BalanceEffects of a Budget DeficitREAL EXCHANGE RATE (Percert) 3. Effects of a government budget deficitOn the following graph, plot the relationship between the real interest rate and net capital outflow by using the green points (triangle symbol) to plotConsider a hypothetical open economy. The following table presents data on the relationship between various real interest rates and national saving,the points from the initial data table. Then use the black point (cross symbol) to indicate the level of net capital outfiow at the equilibrium real interestdomestic investment, and net capital outflow in this economy, where the currency is the dollar. Assume that the economy is currently experiencing arate you derived in the previous graph.balanced government budget.Real Interest RateNational SavingDomestic InvestmentNet Capital OutflowNet Capital Outnow(Percent)(Billions of dollars)(Billions of dollars)(Billions of dollars)1076030-1065540-55050NCO45603407010Eqm. NCO2358015Given the information in the preceding table, use the blue points (circle symbol) to plot the demand for loanable funds. Next, use the orange points2(square symbol) to plot the supply of loanable funds. Finally, use the black point (cross symbol) to indicate the equilibrium in this market.-20-15-10-55101520NET CAPITAL OUTFLOW (Bilions of dollars)Market for Loanable Funde10Because of the relationship between net capital outflow and net exports, the level of net capital outflow at the equilibrium real interest rate impliesthat the economy is experiencingDemandNow, suppose the government is experiencing a budget deficit. This means thatwhich leads tov loanable funds.SupplyAfter 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.EquilibriumUse the green line (triangle symbol) to show the supply curve in this market before the budget deficit. Then use the purple line (diamond symbol) toshow the supply curve after the budget deficit.(?20406080100QUANTITY OF LOANABLE FUNDS (Billions of dollars)Market for Forelgn-Currency Exchange10On the folowing graph, plot the relationship between the real interest rate and net capital outflow by using the green points (triangle symbol) to plotthe points from the initial data table. Then use the black point (cross symbol) to indicate the level or net capital outfilow at the equilibrium real interestInitial Supplyrate you derived in the previous graph.6Supply with DeficitNet Capital Outriow10NCODemandREAL EXCHANGE RATE (Percently

Domestic investment is the demand for loanable funds, while national saving is the supply of…

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 dollar. Assume that the economy is currently experiencing a balanced government budget. NOTE: follow RED ARROWS for the order of the questions (IT IS PART OF THE SAME QUESTION!!!!!) NOTE: HERE ARE THE OPTIONS FOR THE BLANKS: 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 _ (a trade deficit OR balanced trade OR a trade surplus) Now, suppose the government is experiencing a budget deficit. This means that (national saving will increase OR national saving will decrease OR domestic investment will increase OR domestic investment will decrease), which leads to ____ (an increase in the supply of OR a decrease in the supply of OR an increase in the demand for OR a decrease in the demand for) loanable funds Effects of a Budget Deficit: Options for real interest rate (increases OR decreases) Options for real exchange rate (increases OR decreases) Options for trade balance (surplus OR deficit)

Essentials of Economics (MindTap Course List)

8th Edition

ISBN:9781337091992

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter18: Savings,investment And The Financial System

Section: Chapter Questions

Problem 5PA

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Question

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 dollar. Assume that the economy is currently experiencing a balanced government budget.

NOTE:

follow RED ARROWS for the order of the questions (IT IS PART OF THE SAME QUESTION!!!!!)

NOTE:

HERE ARE THE OPTIONS FOR THE BLANKS:

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 _____ (a trade deficit OR balanced trade OR a trade surplus)

Now, suppose the government is experiencing a budget deficit. This means that ______ (national saving will increase OR national saving will decrease OR domestic investment will increase OR domestic investment will decrease), which leads to ______ (an increase in the supply of OR a decrease in the supply of OR an increase in the demand for OR a decrease in the demand for) loanable funds

Effects of a Budget Deficit:

Options for real interest rate (increases OR decreases)

Options for real exchange rate (increases OR decreases)

Options for trade balance (surplus OR deficit)

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 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 Forelgn-Currency Exchange
10
Initial Supply
Supply with Deficit
Demand
-20
-15
-10
-5
5
10
15
20
QUANTITY OF DOLLARS (Bilions)
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 (Percert)

3. Effects of a government budget deficit
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
Consider a hypothetical open economy. The following table presents data on the relationship between various real interest rates and national saving,
the points from the initial data table. Then use the black point (cross symbol) to indicate the level of net capital outfiow at the equilibrium real interest
domestic investment, and net capital outflow in this economy, where the currency is the dollar. Assume that the economy is currently experiencing a
rate you derived in the previous graph.
balanced government budget.
Real Interest Rate
National Saving
Domestic Investment
Net Capital Outflow
Net Capital Outnow
(Percent)
(Billions of dollars)
(Billions of dollars)
(Billions of dollars)
10
7
60
30
-10
6
55
40
-5
50
50
NCO
45
60
3
40
70
10
Eqm. NCO
2
35
80
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
2
(square symbol) to plot the supply of loanable funds. Finally, use the black point (cross symbol) to indicate the equilibrium in this market.
-20
-15
-10
-5
5
10
15
20
NET CAPITAL OUTFLOW (Bilions of dollars)
Market for Loanable Funde
10
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
Demand
Now, suppose the government is experiencing a budget deficit. This means that
which leads to
v loanable funds.
Supply
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.
Equilibrium
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.
(?
20
40
60
80
100
QUANTITY OF LOANABLE FUNDS (Billions of dollars)
Market for Forelgn-Currency Exchange
10
On the folowing 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 (cross symbol) to indicate the level or net capital outfilow at the equilibrium real interest
Initial Supply
rate you derived in the previous graph.
6
Supply with Deficit
Net Capital Outriow
10
NCO
Demand
REAL EXCHANGE RATE (Percently

Definition Definition Difference in value of a country's net exports and net imports for goods and services in a given period. A positive balance of trade is called a surplus and coincides with more net cash inflows into a country; a negative balance of trade deficit is a deficit and results in net cash outflows. A balance of trade surplus or deficit doesn't necessarily indicate a positive or negative situation for a country.

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