AP Macroeconomics
AP 6.1
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(Krugman Module 41)
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Mankiw Ch. 31
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A Trade Deficit exists and spending is greater than saving. Imports are greater than exports. Therefore, the spending is financed by selling assets to foreigners, NCO inflows are greater than outflows.
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A Trade Surplus exists and
saving is greater than spending. Exports are greater than imports. Therefore, there are loanable funds available to buy foreign assets, NCO outflows are greater than inflows. |
1. The government may end a tax credit on capital investment for firms.
2. Firms would decrease spending on capital. 3. Production would likely decrease. 4. The price level would increase from P1 to P2. 5. In the FOREX, Europeans will demand less USD because the price level in the US has increased relative to the European price level. |
OR,
1. The government may provide tax deductions to consumers for spending on energy efficient goods and services. 2. Consumer spending would increase. 3. Price level would increase from P1 to P2. 4. In the FOREX, again, Europeans will demand less USD because the price level in the US has increased relative to the European price level |
Increased Demand for Loanable Funds:
Decreased Demand for Loanable Funds:
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.Increased Supply of Loanable Funds:
Decreased Supply of Loanable Funds:
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Suppose fiscal policy is used to decrease consumer spending,
1. Aggregate demand decreases in the aggregate market. 2. The price level will decrease. 3. The supply of loanable funds (savings) increases. 4. The interest rate in the loanable funds market decreases. 5. Supply of USD to the FOREX increases in pursuit of higher interest rates or rates of return from foreign assets. 6. Fewer Euros are exchanged for USD. 7. The USD depreciates relative to the Euro. |
Suppose government budget deficit occurs,
3. The supply of loanable funds (savings) decreases 4. The interest rate in the loanable funds market increases. 5. Supply of USD to the FOREX decreases because people will keep their money domestically in accounts that now have higher interest rates or rates of return. 6. An increase in Euros are exchanged for USD. 7. The USD appreciates relative to the Euro. |