Real interest rate (percent per year]SLF1SLFOSLF2Loanable funds (trillions of 2009 dollars)In the above figure, the economy is at point a on the initial supply of loanable funds curve SLFO.What happens if the real interest rate rises?Nothing; the economy would remain at point a.There would be a movement to a point such as b on supply of loanable funds curve SLFO.O The supply of loanable funds curve would shift rightward to a curve such as SLF2.The supply of loanable funds curve would shift leftward to a curve such as SLF1.

In an economy the rate of interest determines the price at which borrowers and savers agree to…

Real interest rate (percent per year) SLF1 b SLFO SLF2 Loanable funds (trillions of 2009 dollars) In the above figure, the economy is at point a on the initial supply of loanable funds curve SLFO. What happens if the real interest rate rises? O Nothing; the economy would remain at point a. O There would be a movement to a point such as b on supply of loanable funds curve SLFO- O The supply of loanable funds curve would shift rightward to a curve such as SLF 2. O The supply of loanable funds curve would shift leftward to a curve such as SLF1.

Real interest rate (percent per year) SLF1 b SLFO SLF2 Loanable funds (trillions of 2009 dollars) In the above figure, the economy is at point a on the initial supply of loanable funds curve SLFO. What happens if the real interest rate rises? O Nothing; the economy would remain at point a. O There would be a movement to a point such as b on supply of loanable funds curve SLFO- O The supply of loanable funds curve would shift rightward to a curve such as SLF 2. O The supply of loanable funds curve would shift leftward to a curve such as SLF1.

Essentials of Economics (MindTap Course List)

8th Edition

ISBN:9781337091992

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter18: Savings,investment And The Financial System

Section: Chapter Questions

Problem 3PA

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The graph illustrates the demand for loanable funds and the private supply of loanable funds when the government budget is balanced. In the graph, draw the supply of loanable funds curve if the government budget surplus is $0.2 trillion. Label the curve. Draw a point to show the new equilibrium real interest rate and quantity of loanable funds. >>> Draw only the objects specified in the question.
Show the effect on the real interest rate and equilibrium quantity of loanable funds of a decrease in the demand for loanable funds and a smaller decrease in the supply of loanable funds. Draw a demand for loanable funds curve. Label it DLF0. Draw a supply of loanable funds curve. Label it SLF0. Draw a point at the equilibrium real interest rate and quantity of loanable funds. Label it 1. Draw a curve that shows a decrease in the demand for loanable funds. Label it DLF1. Draw a curve that shows a smaller decrease in the supply of loanable funds. Label it SLF1. Draw a point at the new equilibrium real interest rate and quantity of loanable funds. Label it 2.
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Scenario 1: Suppose savers either buy bonds or make deposits in savings accounts at banks. Initially, the interest income earned on bonds or deposits is taxed at a rate of 20%. Now suppose there is an increase in the tax rate on interest income, from 20% to 25%. Shift the appropriate curve on the graph to reflect this change. This change in the tax treatment of interest income from saving causes the equilibrium interest rate in the market for loanable funds to Fall/Rise and the level of investment spending to decrease/Increase Scenario 2: An investment tax credit effectively lowers the tax bill of any firm that purchases new capital in the relevant time period. Suppose the government implements a new investment tax credit. Shift the appropriate curve on the graph to reflect this change. The implementation of the new tax credit causes the interest rate to Fall/Rise and the level of investment to Fall/Rise . Scenario 3: Initially, the government's budget is…
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