Suppose a hypothetical open economy uses the U.S. dollar as currency. The table below presents data describing the relationship between different real interest rates and this economy’s levels of national saving, domestic investment, and net capital outflow. Assume that the economy is currently operating under a balanced government budget

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3. Effects of a government budget deficit

Suppose a hypothetical open economy uses the U.S. dollar as currency. The table below presents data describing the relationship between different real interest rates and this economy’s levels of national saving, domestic investment, and net capital outflow. Assume that the economy is currently operating under a balanced government budget.
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.
REAL INTEREST RATE
-20
Net Capital Outflow
10
-5
8
6
4
2
0
-15
-10
0
5
10
NET CAPITAL OUTFLOW (Billions of dollars)
15
20
NCO
Eqm. NCO
?
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
loanable funds.
which leads to
Transcribed Image Text: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. REAL INTEREST RATE -20 Net Capital Outflow 10 -5 8 6 4 2 0 -15 -10 0 5 10 NET CAPITAL OUTFLOW (Billions of dollars) 15 20 NCO Eqm. NCO ? 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 loanable funds. which leads to
Suppose a hypothetical open economy uses the U.S. dollar as currency. The table below presents data describing the relationship between different
real interest rates and this economy's levels of national saving, domestic investment, and net capital outflow. Assume that the economy is currently
operating under a balanced government budget.
Real Interest Rate
(Percent)
7
6
5
4
3
2
REAL INTEREST RATE
10
8
Given the information in the table above, 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.
0
0
National Saving
(Billions of dollars)
40
35
30
25
20
15
20
Market for Loanable Funds
40
60
QUANTITY OF LOANABLE FUNDS
Domestic Investment
(Billions of dollars)
30
35
40
45
50
55
80
100
o
Net Capital Outflow
(Billions of dollars)
-20
-15
Demand
CO
Supply
-10
-5
0
5
Equilibrium
Transcribed Image Text:Suppose a hypothetical open economy uses the U.S. dollar as currency. The table below presents data describing the relationship between different real interest rates and this economy's levels of national saving, domestic investment, and net capital outflow. Assume that the economy is currently operating under a balanced government budget. Real Interest Rate (Percent) 7 6 5 4 3 2 REAL INTEREST RATE 10 8 Given the information in the table above, 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. 0 0 National Saving (Billions of dollars) 40 35 30 25 20 15 20 Market for Loanable Funds 40 60 QUANTITY OF LOANABLE FUNDS Domestic Investment (Billions of dollars) 30 35 40 45 50 55 80 100 o Net Capital Outflow (Billions of dollars) -20 -15 Demand CO Supply -10 -5 0 5 Equilibrium
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