Final answer:
In the long run, a higher U.S. government budget deficit decreases the supply of loanable funds and increases the equilibrium real interest rates as per the open-economy macroeconomic model.
Step-by-step explanation:
When the U.S. government runs a significantly higher budget deficit due to the COVID stimulus package, according to the open-economy macroeconomic model, in the long run, this huge federal deficit would reduce the supply of loanable funds and the equilibrium real interest rates would rise. This connection is based on the premise that government borrowing competes with private sector borrowing. As government borrowing increases, it 'crowds out' private investors by absorbing a significant portion of the available loanable funds, which leads to a scarcity of funds. This scarcity subsequently raises the cost of borrowing, represented as an increase in the real interest rates. In addition, as deficits grow, there's pressure on the government to decrease its budget deficits, which might involve politically challenging decisions like spending cuts and tax increases that have a contractionary effect on the economy.