(A) The government increases spending without raising taxes. (Assume that the government is already running a deficit.) Loanable Funds D LF 2 Real Interest.

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Presentation transcript:

(A) The government increases spending without raising taxes. (Assume that the government is already running a deficit.) Loanable Funds D LF 2 Real Interest Rate 0 D LF 1 Quantity of Loanable Funds S LF 1 r1 r2 Q LF 1Q LF 2

(B) The government increases tax rates on income from interest payments. Loanable Funds 0 Quantity of Loanable Funds Real Interest Rate D LF 1 S LF 1 r1 r2 S LF 2 Q LF 1 Q LF 2

(C) The government decreases taxes without decreasing spending. (Assume that the government is already running a deficit.) Loanable Funds D LF 2 Real Interest Rate 0 D LF 1 Quantity of Loanable Funds S LF 1 r1 r2 Q LF 1Q LF 2

0 Quantity of Loanable Funds (D) A medical study comes out showing that people are living longer than before, which encourages people to save more for retirement. Real Interest Rate D LF 1 S LF 1 r1 r2 Loanable Funds S LF 2 Q LF 1 Q LF 2

(E) The government increases the portion of their income that individuals can invest in their retirement account each year without paying taxes on it. Real Interest Rate 0 D LF 1 Quantity of Loanable Funds S LF 1 r1 r2 Loanable Funds S LF 2 Q LF 1 Q LF 2

(F) The government offers a tax incentive to businesses that invest in plant and equipment. Real Interest Rate 0 D LF 1 Quantity of Loanable Funds S LF 1 r1 r2 Loanable Funds D LF 2 Q LF 1Q LF 2

(G) Personal savings rates in America increase, for whatever reason. Real Interest Rate 0 D LF 1 Quantity of Loanable Funds S LF 1 r1 r2 Loanable Funds S LF 2 Q LF 1 Q LF 2

(H) Penn State University releases a report that real GDP will increase less than previously thought this year. D LF 1 Real Interest Rate 0 D LF 2 Quantity of Loanable Funds S LF 1 r2 r1 Loanable Funds Q LF 2Q LF 1

(I) The government decreases spending without decreasing taxes. (Assume the government was running a deficit.) Real Interest Rate 0 D LF 2 Quantity of Loanable Funds S LF 1 r2 r1 Loanable Funds D LF 1 Q LF 2Q LF 1

(J) OK, let’s try to tie this back to monetary policy: the Federal Reserve buys bonds on the open market. This works a little differently than the previous examples, but see if you can figure it out. Real Interest Rate 0 D LF 1 Quantity of Loanable Funds S LF 1 r1 r2 Loanable Funds S LF 2 Q LF 1 Q LF 2