Answer to Question #178504 in Macroeconomics for BISMARK KWAME

Question

1.      Assume a small open economy in which domestic and global interest rates are equal. Using the loanable funds model and the open economy model to determine what changes in the economy if the US government runs a budget deficit.

a)     There will be an outflow of capital, the real exchange rate will appreciate and net exports will decline

b)     There will be an inflow of capital, the real exchange rate will appreciate and net exports will decline

c)      There will be an inflow of capital, the real exchange rate will depreciate and net exports will increase

d)     There will be an outflow of capital, the real exchange rate will depreciate and net exports will increase

e)     Do not answer this question

Answer 1

c) There will be an inflow of capital, the real exchange rate will depreciate and net exports will increase