00:02
Consider a closed economy.
00:04
Show the effect of deficit budget of government in the framework of loanable funds market.
00:16
So first of all, in a closed economy, we have an economy which does not allow international trade or movement of financial assets into or out of the country.
00:26
The budget deficit is when taxed collected are less than the amount of government spending.
00:34
The difference between taxes and government spending is the budget deficit.
00:38
So basically the government did not collect enough taxes to offset its spending.
00:49
The market for loanable funds is a hypothetical market that shows how loans from saviors are allocated to borrowers who have investment projects.
01:05
So deficits will increase the demand for loanable funds.
01:14
The logic of this point of view is that if the government runs a deficit, it has to borrow money.
01:23
So the demand for loanable funds will increase because the government gets in line to borrow.
01:28
Money.
01:33
So that makes sense because now we have another entity consuming the loadable funds.
01:40
So the demand goes up.
01:42
Deficits decrease the supply of loanable funds.
01:51
So that makes sense because if the government owes money, then there would be less supply of funds that they can loan out...