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Principles of Economics- Mankiw (5th) 666

Principles of Economics- Mankiw (5th) 666 - 688 PA R T E L...

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688 PART ELEVEN THE MACROECONOMICS OF OPEN ECONOMIES First, we determine which of the supply and demand curves the event affects. Second, we determine which way the curves shift. Third, we use the supply-and- demand diagrams to examine how these shifts alter the economy’s equilibrium. GOVERNMENT BUDGET DEFICITS When we first discussed the supply and demand for loanable funds earlier in the book, we examined the effects of government budget deficits, which occur when government spending exceeds government revenue. Because a government bud- get deficit represents negative public saving, it reduces national saving (the sum of public and private saving). Thus, a government budget deficit reduces the supply of loanable funds, drives up the interest rate, and crowds out investment. Now let’s consider the effects of a budget deficit in an open economy. First, which curve in our model shifts? As in a closed economy, the initial impact of the
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