The national government increases spending and lowers taxes in an effort to stim
ID: 1188675 • Letter: T
Question
The national government increases spending and lowers taxes in an effort to stimulate the nation’s economy. The budget deficit is increased, so the treasury borrows funds to finance the higher deficit. The country has flexible exchange rates and central bank does not intervene in the foreign exchange market.
A) Show the shift in the supply or demand for RLF by inserting a new curve. Insert arrows to show the change in R and RLF.
B) The government borrowing causes R to (rise or fall) and RLF to (rise or fall).
Explanation / Answer
a) There will be higher demand of funds when government has budget deficits. Thus demand of RLF increases and R increases. Demand curve of RLF shifts rightward.
b) Government borrowing increases RLF and increases R.