5. Impact of budget deficits The following graph shows the loanable funds market in the United States. It plots both the demand (D) for loanable funds and the supply (S) of loanable funds. At the current equilibrium, the government is operating with a balanced budget. Assume now that the financial industry is close to bankruptcy and the U.S. government decides to implement a bailout plan of several billion dollars without increasing taxes, causing a budget deficit. Show the effect of the budget deficit on the market for loanable funds by shifting the demand (D) curve, the supply (S) curve, or both. INTEREST RATE LOANABLE FUNDS Based on this model, the budget deficit leads to 4 - 4 - in the level of investment and in the interest rate.
5. Impact of budget deficits The following graph shows the loanable funds market in the United States. It plots both the demand (D) for loanable funds and the supply (S) of loanable funds. At the current equilibrium, the government is operating with a balanced budget. Assume now that the financial industry is close to bankruptcy and the U.S. government decides to implement a bailout plan of several billion dollars without increasing taxes, causing a budget deficit. Show the effect of the budget deficit on the market for loanable funds by shifting the demand (D) curve, the supply (S) curve, or both. INTEREST RATE LOANABLE FUNDS Based on this model, the budget deficit leads to 4 - 4 - in the level of investment and in the interest rate.
Chapter21: Financial Markets, Saving, And Investment
Section: Chapter Questions
Problem 9P
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Transcribed Image Text:Homework (Ch 23)
5. Impact of budget deficits
The following graph shows the loanable funds market in the United States. It plots both the demand (D) for loanable funds and the supply (S) of
loanable funds. At the current equilibrium, the government is operating with a balanced budget. Assume now that the financial industry is close to
bankruptcy and the U.S. government decides to implement a bailout plan of several billion dollars without increasing taxes, causing a budget deficit.
Show the effect of the budget deficit on the market for loanable funds by shifting the demand (D) curve, the supply (S) curve, or both.
INTEREST RATE
LOANABLE FUNDS
Based on this model, the budget deficit leads to
D
$ 6 m
D/
in the level of investment and
in the interest rate.
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