14OpenEconomy MacroModel

14OpenEconomy MacroModel - Chapter 14/A Macroeconomic...

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Unformatted text preview: Chapter 14/A Macroeconomic Theory of the Open Economy 2. 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 4. 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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14OpenEconomy MacroModel - Chapter 14/A Macroeconomic...

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