Suppose that Imagineland is an open economy. Initially, the government balanced. Suppose the government runs a...

Suppose that Imagineland is an open economy. Initially, the government balanced. Suppose the government runs a budget surplus.

a. Use the appropriate diagrams to determine the effects on the real interest funds market.

b. In the foreign currency exchange market, show the effects of the budget the balance of trade.

Expert Solution

This is shown in the diagram below, explanation follows.

A. The budget srplus will mean that there are more funds available in the real interest funds market. This is shown as movement from S1 to S2, where S1 is a balanced budget and S2 is a surplus budget. This will lower the interest rate from r1 to r2. The decline in the interest rates will increase the net capital outflow, which is shown in the second graph.

B. In the foreign exchange market, the increased capital outflow will result in the supply of dollars moving to the right, as shown in graph 3. This will mean the real interest rate will decrease from E1 to E2.

Rahul Sunny answered 2 years ago

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Suppose that Imagineland is an open economy. Initially, the government balanced. Suppose the government runs a...

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