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Attempts Attempt $1$ score is $4\mathrm{.}7$Attempt $2$ score is $3\mathrm{.}7$

Keep the Highest $4\mathrm{.}7$ out of $64\mathrm{.}7/6$

$3.$ 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.

Real Interest Rate

National Saving

Domestic Investment

Net Capital Outflow

$($Percent$)$

$($Billions of dollars$)$

$($Billions of dollars$)$

$($Billions of dollars$)$

$76030-1065540-555050044560534070102358015$

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.

Market for Loanable FundsDemandSupplyEquilibrium$0204060801001086420$REAL INTEREST RATEQUANTITY 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 outflow at the equilibrium real interest rate you derived in the previous graph.

Net Capital OutflowNCOEqm. NCO$-20-15-10-5051015201086420$REAL INTEREST RATENET CAPITAL OUTFLOW $($Billions of dollars$)$

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 Foreign$-$Currency ExchangeInitial SupplySupply with Deficit$-20-15-10-5051015201086420$REAL EXCHANGE RATEQUANTITY OF DOLLARS $($Billions$)$Demand

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$$

$$

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