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Tutorial Chapter 32 - Tutorial Chapter 32 Question 1 a A...

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Tutorial Chapter 32 Question 1 a) A reduction in the U.S. government budget deficit would increase national saving, shifting the supply curve of loanable funds to the right in Figure 3. This would reduce the real interest rate in the United States, thus increasing net capital outflow, and reducing the real exchange rate. The real value of the dollar would decline, not increase as the president suggested. However, the trade deficit will decline. b) The increased confidence would lead to a reduction in net capital outflow as shown in Figure. The demand for loanable funds will fall, along with the real interest rate. The decline in net capital outflow will also reduce the supply of dollars, increasing the real exchange rate. Thus, the trade balance will move toward deficit.
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Question 2 a) If Congress passes an investment tax credit, it subsidizes domestic investment. The desire to increase domestic investment leads firms to borrow more, increasing the demand for loanable funds, as shown in Figure. This raises the real interest rate, thus reducing net capital outflow. The decline in net capital
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