Quiz2AAnswer

Quiz2AAnswer - ECO 420-002 and 004 Fall 2008 Quiz 2A On my honor I have neither given nor received unauthorized aid on this quiz Name Section 1

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ECO 420-002 and 004, Fall 2008 Quiz 2A On my honor, I have neither given nor received unauthorized aid on this quiz: ______________ Name:___________________________________________ Section: _______________ 1. There is a plethora of research that has found the federal deficit and the trade deficit to be correlated thus providing evidence for the “twin deficit” problem faced by some countries. Use the “loanable funds” model for a small country to explain how an increase in domestic federal deficit spending will result in increasing the size of the trade deficit.(5 points) S 1 S 0 r TRADE DEFICIT r* I S, I An increase in deficit spending will reduce national savings shifting the S curve to the left. A small country will take the world interest rate as given and will borrow at r*. The deficit in the current account will widen as shown in the graph. (In the context of the foreign exchange market, the real exchange rate will rise decreasing net exports. The foreign exchange market graph is not required to answer this question.)
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This document was uploaded on 10/28/2011 for the course ECON 420 at UNC.

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Quiz2AAnswer - ECO 420-002 and 004 Fall 2008 Quiz 2A On my honor I have neither given nor received unauthorized aid on this quiz Name Section 1

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