Figure 32-5
Refer to this diagram of the open-economy macroeconomic model to answer the questions below.

-Refer to Figure 32-5.Starting from 3% and .75,an increase in the government budget deficit can be illustrated as a move to
A)4% and 1
B)4% and .5
C)2% and 1
D)2% and .5

Question

Figure 32-5
Refer to this diagram of the open-economy macroeconomic model to answer the questions below.

-Refer to Figure 32-5.Starting from 3% and .75,an increase in the government budget deficit can be illustrated as a move to
A)4% and 1 
B)4% and .5 
C)2% and 1 
D)2% and .5

Quizplus · Accepted Answer

An increase in the government budget deficit causes an increase in the equilibrium interest rate (r) and a decrease in the equilibrium level of net exports (NX) in the short run. This can be shown as a shift in the IS curve to the left, resulting in a new equilibrium point with a higher interest rate and a lower level of output. The new equilibrium point is at a higher point than the original point on the LM curve. Since the initial point was 3% and .75, the closest option to a new equilibrium point with a higher interest rate and a lower level of output is 4% and 1. Choice A is the only option that satisfies this condition.

Figure 32-5 Refer to This Diagram of the Open-Economy Macroeconomic Model to Model