Air Purifier, Inc., computes its break-even point strictly on the basis of cash expenditures related to fixed costs. Its total f
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Answer:
1. Decrease, increase
2. Supply curve shifts to the right
3. NCO will rise
4. Real exchange rate falls and net exports rises
Explanation:
Fiscal deficit occurs when government spending's exceed government revenue. When the government lowers its export subsidies while keeping other spending's and taxes unchanged, it leads to a fall in the fiscal deficit.
1. However, the reduction in expenditure on export subsidies <em>decreases</em> the fiscal deficit, thereby <em>increases </em>public savings.
2. As public savings increase it leads to an increase in funds available to be loaned out. So the <em>supply curve</em> for loanable funds will <em>shift to the right</em> from S1 to S2. This will lead to a <em>fall</em> in the interest rate.
3. As we know that net capital outflow is inversely related to the interest rate. A fall in the interest rate above will lead to a <em>rise</em> in net capital outflow.
4. When net capital outflow increases, people move funds out of the country. Thus, supply of dollars will increase. While demand for dollars has remained unchanged, it leads to a<em> fall</em> in the real exchange rate. As exchange rate falls, the equilibrium level of net exports will <em>rise</em>.
