The national government increases spending and lowers taxes in an effort to rais
ID: 1188677 • Letter: T
Question
The national government increases spending and lowers taxes in an effort to raise RGDP and lower the unemployment rate. However, the budget deficit is increased, so the treasury borrows funds to finance the higher deficit. The country has fixed exchange rates with the US dollar which the central bank maintains through aggressive intervention 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 and RLF to (rise or fall).
Explanation / Answer
a) Demand curve of RLF shifts right as government increases the budget deficit. R and RLF increases from initial position.
b) Government borrowing causes R and RLF to rise