Transcript c. Demand for loanable funds curve to the right.

Loanable
Funds
Draw a properly labeled
loanable funds graph
Interest rate
Draw a properly labeled
loanable funds graph
S
E
D
Quantity of loanable funds
In each of the situations given:
Sketch the change in the graph that will occur
What happens to equilibrium interest rate?
What happens to equilibrium quantity of loanable funds
Interest rate
•
•
•
S
E
D
Quantity of loanable funds
In each of the situations given:
•
•
•
Sketch the change in the graph that will occur
What happens to equilibrium interest rate?
What happens to equilibrium quantity of loanable funds
There is an increase in
capital inflows into the
country.
In each of the situations given:
Sketch the change in the graph that will occur
What happens to equilibrium interest rate?
What happens to equilibrium quantity of loanable funds
R
Q lf
Interest rate
•
•
•
S
S1
E
D
Quantity of loanable funds
In each of the situations given:
•
•
•
Sketch the change in the graph that will occur
What happens to equilibrium interest rate?
What happens to equilibrium quantity of loanable funds
The government reduces
the government deficit
In each of the situations given:
Sketch the change in the graph that will occur
What happens to equilibrium interest rate?
What happens to equilibrium quantity of loanable funds
R
Q lf
Interest rate
•
•
•
S
E
D2
D
Quantity of loanable funds
In each of the situations given:
•
•
•
Sketch the change in the graph that will occur
What happens to equilibrium interest rate?
What happens to equilibrium quantity of loanable funds
There is an increase in
private savings
In each of the situations given:
Sketch the change in the graph that will occur
What happens to equilibrium interest rate?
What happens to equilibrium quantity of loanable funds
R
Q lf
Interest rate
•
•
•
S
S1
E
D
Quantity of loanable funds
In each of the situations given:
•
•
•
Sketch the change in the graph that will occur
What happens to equilibrium interest rate?
What happens to equilibrium quantity of loanable funds
There is decrease in
perceived business
opportunities
In each of the situations given:
Sketch the change in the graph that will occur
What happens to equilibrium interest rate?
What happens to equilibrium quantity of loanable funds
R
Q lf
Interest rate
•
•
•
S
E
D2
D
Quantity of loanable funds
When the government runs a deficit, this shifts the
a. Supply of loanable funds curve to the right.
b. Supply of loanable funds curve to the left.
c. Demand for loanable funds curve to the right.
d. Demand for loanable funds curve to the left.
When the government runs a deficit, this shifts the
a. Supply of loanable funds curve to the right.
b. Supply of loanable funds curve to the left.
c. Demand for loanable funds curve to the right.
d. Demand for loanable funds curve to the left.
2. Assume that the loanable funds market in Country X is
currently in equilibrium.
(a) Draw a correctly labeled graph of the loanable funds
market for Country X, and label the equilibrium interest
rate as r* and the quantity of funds
as QF*
Interest rate
S
r*
D
QF*
Quantity loanable
funds
2. Assume that the loanable funds market in Country X is currently
in equilibrium.
(a) Draw a correctly labeled graph of the loanable funds
market for Country X, and label the equilibrium interest
rate as r* and the quantity of funds
as QF*
(b) Assume that the government of Country X, which had a
balanced budget, now increases its spending while holding
taxes constant. Assume that the government funds the
increase in spending with increased borrowing.
(i) What will be the impact of this policy action on the
government’s budget balance?
There will be a budget deficit
(b) Assume that the government of Country X, which had a
balanced budget, now increases its spending while holding
taxes constant. Assume that the government funds the
increase in spending with increased borrowing.
(i) What will be the impact of this policy action on the
government’s budget balance?
There will be a budget deficit
(ii) On your graph in part (a), show the impact of this
policy action on the interest rate and quantity of funds
Interest rate
S
r1
r*
D1
QF*
QF1
Quantity loanable
funds
(c) Given your answer in part (b) (ii), how will private-sector
interest-sensitive expenditures be affected?
Interest rate
(c) Given your answer in
part (b) (ii), how will
private-sector interestsensitive expenditures be
affected?
S
r1
r*
D1
Higher interest rates will
reduce consumption and
especially investment
spending. Government
spending crowds out
private spending
QF*
QF1
Quantity loanable
funds
(d) Given your answer in part (c), what will be the impact on
the long-run growth rate of the economy?
The growth rate for the economy will decrease because there will
be less investment in capital. Slowing the growth of capital will
slow economic growth in general