1/ How the 2 key policies of the government affect the GDP?

Monetary policy and Fiscal policy will change

 Cut tax -> Save more -> spend more -> Consumption (C) increase
 More investment by lower interest rate by buying bonds
 Increase Gov. Spending (G) by build airport, facilities … -> Demand more ->
increase GDP.
 Increase Export:
- Export more oil, T – shirt -> Demand more labour, equipment
- Devalue domestic currency by bump more money to the market -> speed up
export.

As a result, the Money Supply (MS) in the market will change, lead to the change in
interest rate (r) and shift the Aggregate Demand (AD) curve, change in AD will
change the GDP (Y) while the Price (P) unchanged.

Interest rate (r) P

MS2 MS1

r2
P1

r1 AD1
MD
AD2

Y2 Y1
Money Y
 2/ How does the budget deficit affect the U.S. Net Export?

The government shortage of money supply in the market will decrease, the Aggregate
Supply curve shifts to the left (Graph 1) and lead to the increase in interest rate. Due to
the rise in exchange rate, the Investment from foreign countries will rise, so that the Net
Capital Outflow (NCO) will decrease because NCO = Cash Outflow – Cash Inflow
(Graph 2). The real exchange rate appreciates, reducing net exports (Graph 3).

Interest rate (r) Interest rate (r)

S’
S

r’
r

NCO
D = I + NCO

Money (Graph 2) NCO’ NCO

(Graph 1) NCO

Exchange rate (E)

S = NCO

E’
E

D = NX

(Graph 3) NCO’ NCO USD