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Brief Principles of Macroeconomics...

8th Edition
N. Gregory Mankiw
ISBN: 9781337091985

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BuyFindarrow_forward

Brief Principles of Macroeconomics...

8th Edition
N. Gregory Mankiw
ISBN: 9781337091985
Textbook Problem

If a popular TV show on personal finance convinces Americans to save more for retirement, the _____ curve tor loanable funds would shift, driving the equilibrium interest rate _____.

a. supply, up

b. supply, down

c. demand, up

d. demand, down

To determine

The effect of the save more for retirement on the loanable fund market.

Explanation

When more people follow the 'live for today approach', they would give importance to the things that matters them which will be the things that takes place at present. They would never give importance to the things that would happen in the future. As a result of this attitude of the people, the savings in the economy will fall and the consumption will increase. When something happen inverse, it encourages the people to save more for future, the inverse will happen.

Option (b):

When the people follow the option to save more for the retirement life of the people, the people will save more against the 'live for today' approach. Since the savings is the capital for the loanable fund market, the increase in the savings will increase the supply of loanable fund market and it will shift rightwards. As a result of this, there will be a new equilibrium where the interest rate will be lower. So, the program will lead to shift in the supply curve for loanable fund market and will bring down the interest rate. Thus, option 'b' is correct.

Option (a):

When the people follow the option to save more for the retirement life of the people, the people will save more against the 'live for today' approach. This will increase savings and as a result, the supply curve for the loanable fund market will shift towards the right which will reduce the interest rate...

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