The market for loanable funds is in equilibrium. All else equal, the federal government deficit is growing. Describe how this will affect the market for loanable funds, the equilibrium interest rate, and the equilibrium quantity of loanable funds. (Hint: use a graph) [12 points]
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The market for loanable funds is initially in equilibrium, which means that the supply of loanable funds (savings) is equal to the demand for loanable funds (investment and government borrowing). Show more…
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'The following graph shows the market for loanable funds On the graph, show the effects of an increase in the prices of food and other products of agriculture on the market for loanable funds: Supply Demand L 2 1 Supply Demand QUANTITY OF LOANABLE FUNDS The equilibrium interest rate result of an increase in the price of agricultural output:'
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3. Draw and label a graph showing equilibrium in the market for loanable funds. Explain why the demand for loanable funds slopes downward and the supply of loanable funds slopes upward. Using the graph previously created (representing the market for loanable funds), show and explain what happens to interest rates and investment if a government goes from a deficit to a surplus.
Draw a graph to illustrate how an increase in the supply of loanable funds and a decrease in the demand for loanable funds can lower the real interest rate and leave the equilibrium quantity of loanable funds unchanged.
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