What Is the Connection Between an Increase in Government Purchases
What is the connection between an increase in government purchases and the trade deficit? What are the pros and cons associated with a trade deficit that occurs because of this?
Explain why a continued stock market rally (that is, a continued increase in stock prices) will lead to an increase in consumption.
Explain how increased investment in Eastern Europe as well as in other developing countries can result in a decline in U.S. investment. (Hint: What will happen to the demand for foreign currency by international investors relative to their demand for dollars?)
Suppose the government decides to reduce the tax rate for firms that increase their investment. Use the four-diagram approach to show what happens to the interest rate and the shares of GDP in the long run.