Assume the U.S. is a large open economy. Use the appropriate graphs to show how a...

Assume the U.S. is a large open economy. Use the appropriate graphs to show how a decrease in taxes and an increase in government spending would affect national savings, investment, the real exchange rate, net capital outflow, net exports and the real exchange rates. Assume that the tax cuts were equal to government spending.

Expert Solution

A fall in the tax rate and an equivalent rise in the government spending will increase the aggregate spending. This will shift the aggregate demand rightwards and will raised the current level of GDP and the current inflation rate. Increase in G and equvalent fall in T will increase budget defiict so public saving falls. Private saving increases because taxes are reduced and income is increased. National saving will consequently decrease and investment will rise so that there is a net capital inflow. With higher domestic interest rate the real exchange rate would rise so that there is curreny appreciation. Net exports are reduced.

Rahul Sunny answered 2 years ago

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