Suppose the United States decides to subsidize the export of U.S. agricultural products, but it does not increase taxes or decrease any other government spending to offset this expenditure. Using a three-panel diagram, show what happens to national saving, domestic investment, net capital outflow, the interest rate, the exchange rate, and the trade balance. Also explain in words how this U.S. policy affects the amount of imports, exports, and net exports.
Hint: we have two effects playing roles here: (1) the direct effect of export subsidize on NX; (2) the effect resulting from the increase in the government expenditures(government budget deficit)
