1. Loanable Funds

2. Draw a properly labeled loanable funds graph

3. Draw a properly labeled loanable funds graph
Interest rate S E D
Quantity of loanable funds

4. 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

5. 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.

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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.

14. 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.

15. 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*

16. Interest rate S r* D
QF*
Quantity loanable funds

17. 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

18. (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

19. Interest rate S r1 r* D1
QF*
QF1
Quantity loanable funds

20. (c) Given your answer in part (b) (ii), how will private-sector
interest-sensitive expenditures be affected?

21. (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

22. (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