Loanable Funds

Draw a properly labeled loanable funds graph

Draw a properly labeled loanable funds graph 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 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 Interest rate S R Q lf 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 Interest rate S R Q lf 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 Interest rate S R Q lf 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 Interest rate S R Q lf 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.

Free Response Question #2 on the 2015 exam: 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

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 (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?

(c) Given your answer in part (b) (ii), how will private-sector interest-sensitive expenditures be affected? Interest rate S r1 r* Higher interest rates will reduce consumption and especially investment spending. Government spending crowds out private spending D1 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