AP Macroeconomics 2004 Question 2

The supply of savings increases in the LFM, shifting (a) Assume that national saving in the United States increases. Explain the effect of this increase on the real interest rate in the United States. The supply of savings increases in the LFM, shifting the supply curve to the right. The interest rate falls. S interest rate S1 r r1 D Q of $ Q Q1 Loanable Funds Market

U.S. financial assets become less attractive investments, Suppose that real interest rates in the rest of the world remain unchanged. Explain the effect of the real interest rate in the U.S. that you identified in part (a) on the demand for the U.S. dollar in the foreign exchange market. U.S. financial assets become less attractive investments, decreasing the demand for the U.S. dollar. S D Loanable Funds Market interest rate Q of $ S1 r Q r1 Q1 S P of Dollar P P1 D D1 Q of $ Q1 Q Foreign Exchange Market

The international value of the dollar depreciates Suppose that real interest rates in the rest of the world remain unchanged. As a result of the effect you identified in (i), what will happen to the international value of the U.S. dollar? The international value of the dollar depreciates relative to other currencies. S D Foreign Exchange Market P of Dollar Q of $ P Q P1 D1 Q1 S D Loanable Funds Market interest rate Q of $ S1 r Q r1 Q1

(c ) Given your answer in part (b), indicate how each of the following will change. (i) United States imports (ii) United States exports