Funds with Government Borrowing. After an increase in government borrowing, the equilibrium interest rate will rise from 6% to ____%, and the amount of private savings will _____ Interest rate (%) 12 10 8 6 4 2 0 10 20 30 40 50 60 70 80 90 100 Quantity of loanable funds (billions of dollars) Supply of loanable funds Demand for loanable funds 10; stay the same 8; rise 8; fall 10; be indeterminate
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The graph below depicts the loanable funds market in the United States. The interest rate is measured in percent, and quantity is measured in billions of dollars. The supply curve, S2, represents the savings by U.S. households. The demand curve, D1, represents investment spending by U.S. firms on capital projects. Consider the graph from Part 1. If the market is in equilibrium, what will happen to the interest rate and the quantity of funds borrowed in the loanable funds market if the U.S. government needs to borrow $80 billion to finance an infrastructure project? The interest rate will (stay the same/ increase/ decrease). The quantity will (stay the same/ increase/ decrease).
Crystal W.
Manipulate the graph to show what will happen to supply and demand in the market for loanable funds when the government budget deficit increases, changing the equilibrium quantity of loanable funds by 3 percentage points. Ceteris paribus, what is the new interest rate? interest rate: % Ceteris paribus, private investment would not change. decrease. increase.
Andrew D.
Suppose the government borrows $\$ 20$ billion more next year than this year. a. Use a supply-and-demand diagram to analyze this policy. Does the interest rate rise or fall? b. What happens to investment? To private saving? To public saving? To national saving? Compare the size of the changes to the $\$ 20$ billion of extra government borrowing. c. How does the elasticity of supply of loanable funds affect the size of these changes? d. How does the elasticity of demand for loanable funds affect the size of these changes? e. Suppose households believe that greater government borrowing today implies higher taxes to pay off the government debt in the future. What does this belief do to private saving and the supply of loanable funds today? Does it increase or decrease the effects you discussed in parts (a) and (b)?
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