Assume that a country’s economy is operating below full employment and has a balanced trade, and that the government is running a budget deficit.

a. Draw a correctly labeled aggregate demand and aggregate supply graph and show the economy’s current output and price level.

b. Suppose that the country’s government increases spending to achieve full employment output. On your graph in part (a) show the short run effect that the increased deficit spending would have on each of the following: aggregate demand, output, price level

c. Using a correctly labeled loanable funds market graph, show the effect of the increase in deficit spending on the real interest rate.

d. Give your answer in part (c) explain how the international value of the country’s currency may be affected.

e. Based on your answer in part (d) respond to each of the following.
i. Explain the effects on the country’s exports and imports.
ii. Identify the affect on the country’s trade balance.

f. Given the results in the loanable funds market discussed in part (c) explain how this government deficit spending would influence long run growth.