Exploring Economics
8th Edition
ISBN: 9781544336329
Author: Robert L. Sexton
Publisher: SAGE Publications, Inc
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Question
Chapter 21, Problem 8P
To determine
To explain:
The change in the equilibrium interest rate, loanable fund's supply curve, level of loanable funds in the economy and the rate of
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Students have asked these similar questions
Collaboration with Congress during the Clinton Administration allowed for an aggressive deficit-cutting plan to pass. As a result, the government was able to reach a balanced budget at the end of the 90's.
Move the supply and/or demand curves to describe the expected effect that this deficit-reduction likely had upon the loanable funds market.
As a result, private investment should have
a) decreased as the cost of borrowing increased.
b) increased as the cost of borrowing increased.
c) increased because the cost of borrowing decreased.
d) decreased as the cost of borrowing decreased.
How does the government budget deficit impact interest rates, investment, and economic growth? Explain your answer.
Other things the same, an increase in the budget deficit
A.
shifts the supply of loanable funds left, so the interest rate rises.
B.
shifts the demand for loanable funds right, so the interest rate rises.
C.
shifts the demand for loanable funds left, so the interest rate falls.
D.
shifts the supply of loanable funds right, so the interest rate falls.
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Similar questions
- Assume the country’s government increased spending and as a result, the nation ran a deficit. Explain how the increase in government spending will affect real interest rates and show the change on the loanable funds market graph.arrow_forwardCollaboration with Congress during the Clinton administration allowed for an aggressive deficit‑cutting plan to pass. At the end of the 1990s, Congress eliminated the government deficit. Manipulate the graph to illustrate how the elimination of the deficit affects the loanable funds market. look at image for graph What does the model predict will happen to the quantity of private investment as a result of elimination of the government deficit? Private investment will increase because the cost of borrowing increases. decrease because the cost of borrowing increases. decrease because the cost of borrowing decreases. increase because the cost of borrowing decreases.arrow_forwardLoanable fund graph- show the result of a fiscal, crowding out and the effect on the supply of loanable fundsarrow_forward
- The current market rate of interest is 10 percent. At that rate of interest, businesses borrow $300 billion per year for investment and consumers borrow $50 billion per year to finance purchases. The government is currently borrowing $150 billion per year to cover its budget deficit. a. Derive the market demand for loanable funds, and show how investors and consumers will be affected if the budget deficit increases to $250 billion per year. b. Assuming taxpayers do not anticipate an increase in the future market rate of interest due to the increase in budget deficit, show the impact of the increase in the budget deficit on the market for loanable funds. c. How would your conclusion differ if taxpayers fully anticipate future tax increases to offset the increase in the budget deficit? d. Do you think the Ricardian Equivalence is realistic?arrow_forwardConsidering your answer in Q (2), the govt deficit increases. Explain why and also show the impact in the market of loanable funds using a graph. (40 words)arrow_forwardTextbook: Macroeconomics by P. Krugman & R. Wells (5th Edition) Congress estimated that the cost of increasing support and expanding pre-kindergarten education and infant and toddler childcare would cost $28 billion in 2014. Since the U.S. government was running a budget deficit at the time, assume that the new pre-K funding was financed by the government borrowing, which increases the demand for loanable funds without affecting supply. This question considers the likely effect of this government expenditure on the interest rate. a) Draw typical demand (D1) and supply (S1) curves for loanable funds without the cost of the expanded pre-K programs accounted for. Label the vertical axis “Interest rate” and the horizontal axis “Quantity of loanable funds.” Label the equilibrium point (e1) and the equilibrium interest rate (r1). b) Now draw a new diagram with the cost of the expanded pre-K programs included in the analysis. Shift the demand curve in the appropriate direction. Label the…arrow_forward
- Using a graph representing the market for loanable funds, show and explain what happens tointerest rates and investment if a government goes from a deficit to a surplus.arrow_forwardThe current market rate of interest is 10 percent. At that rate of interest, businesses borrow $300 billion per year for investment and consumers borrow $50 billion per year to finance purchases. The government is currently borrowing $150 billion per year to cover its budget deficit. a. Derive the market demand for loanable funds, and show how investors and consumerswill be affected if the budget deficit increases to $250 billion per year. Draw a graph to show your conclusion. b. Assuming taxpayers do not anticipate an increase in the future market rate of interestdue to the increase in budget deficit, show the impact of the increase in the budgetdeficit on the market for loanable funds. c. How would your conclusion differ if taxpayers fully anticipate future tax increases tooffset the increase in the budget deficit? d. Do you think the Ricardian Equivalence is realistic?arrow_forwardThe current market rate of interest is 10 percent. At that rate of interest, businesses borrow $300 billion per year for investment and consumers borrow $50 billion per year to finance purchases. The government is currently borrowing $150 billion per year to cover its budget deficit. a. Derive the market demand for loanable funds, and show how investors and consumers will be affected if the budget deficit increases to $250 billion per year. Draw a graph to show your conclusion. b. Assuming taxpayers do not anticipate an increase in the future market rate of interest due to the increase in budget deficit, show the impact of the increase in the budget deficit on the market for loanable funds.arrow_forward
- Construct the market for loanable funds and use it to illustrate and explain each of the following:a) How an increase in the government budget deficit will affect equilibrium interest rate and investment spending of firms, other factors constantb) How an increase in household savings as they become more financial literate will affect equilibrium interest rate and investment spending of firms, other factors constantc) How an increase in business confidence will affect equilibrium interest rate and investment spending of firms, other factors constant.arrow_forwardDONOT ANSWER QUESTION 1 ONLY 2, • Analyze the effects of a government budget deficit. • Examine how the interest rate is determined in a variety of scenarios. • Synthesize knowledge of saving, investment, and the financial system. Government budget and national saving: 1. Suppose that GDP equals $10 trillion, consumption equals $6.5 trillion, and the government spends $2 trillion and has a budget deficit of $300 billion. Please find public saving, taxes, private saving, national saving, an investment. The model of loanable funds: 2. Please use the loanable funds model to analyze the effects of a government budget deficit (you can attach a copy of your graph showing your work): A. Draw the diagram showing the initial equilibrium. B. Determine which curve shifts when the government runs a budget deficit. C. Draw the new curve on your diagram. D. What happens to the equilibrium values of the interest rate and investment?arrow_forward
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