How does an increase in government purchases financed by an increase in the deficit affect exchange rates? Support your answer with graphs of the loanable funds market and the foreign exchange market
What will be an ideal response?
An increase in government purchases financed by an increase in the deficit will reduce the supply of loanable funds, thereby increasing the interest rate. The increase in the interest rate will increase the demand for dollars (as capital inflows increase) and reduce the supply of dollars (as capital outflows decrease). Both the increase in the demand for dollars and the decrease in the supply of dollars will increase the equilibrium exchange rate, as shown below.
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The three major categories of government spending are
A) government purchases, defense spending, and interest payments. B) defense spending, Medicare and Medicaid, and net interest. C) government purchases, transfer payments, and net interest. D) government purchases, defense spending, and transfer payments
The payoff matrix refers to
a. the difference between total revenue and total cost at different price levels b. a listing of the rewards and penalties associated with pursuing various strategies c. the difference between average and marginal cost for the non-competitive firm d. the difference between average and marginal revenue in a non-competitive industry e. the difference between average variable and average total cost to the firm