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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? Comparethe 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 payoff the government debt in the future. What does this belief do to private saving and the supply ofloanable funds today? Does it increase or decrease the effects you discussed in parts (a) and (b)?
A. SEE EXPLANATIONB. Investment decreases by less than $\$ 20$ billionNational savings decreases by less than $\$ 20$ billionPublic savings decreases by exactly $\$ 20$ billionPrivate savings increases by less than $\$ 20$ billion(c) Elasticity of supply of loanable funds affects the size of above parameters. If supply ofloanable funds is more elastic, the supply curve for the loanable funds will be more flat curve.When government borrowing increases, a flat supply curve will increase interest rate by feweramounts and the national savings would fall by less. If the supply curve is less elastic, theinterest rate will increase by a greater amount.(d) Elasticity of demand for loanable funds will also affect the size of above parameters. Ifdemand for loanable funds is more elastic, the demand curve for the loanable funds will be moreflat curve. When government borrowing increases, a flat demand curve will increase interest rateby fewer amounts; but reduces the national savings by more amounts. If the demand curve isless elastic, the interest rate will increase by a greater amount.(e) The belief that today's government borrowing implies higher tax payments to pay off thegovernment debt in the future leads to increased private savings. People are motivated to savemore for excess tax payments in future. As a result, the supply of loanable funds will increase.Increase in private savings will offset the reduction in public savings; also reduces the amount bywhich national savings decline; also reduces the amount by which interest rate increases.
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May 11, 2020
In part (a) why the supply curve will shift rightwards ? The savings decreases when government borrows which means there will be reduction in supply? i think the supply curve should shift leftwards resulting an increase in interest rates.
October 27, 2020
Finally, the answer I needed, thanks Jesse N.
This will help alot with my midterm
April 15, 2021
First of all the video doesn't cover part b national savings? And in the video it says that private savings will decrease yet in the text answer it says private savings will increase? Ridiculous
April 17, 2021
Hello, for part a), the curve should shift rightwards for decrease in loanable fund, government borrowing reduces the supply which drives up interest rate. please correct. Thank you for your videos.
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Okay, guys, Chapter 26 problem eight in this problem. $20,000,000,000 more this year and unusual. And so then Part Edison, using a graph show where the interest rate will rise or fall. So this graph is going to be the supply and demand graph for low noble science. Wei have amount of fines, and the demand for France's downward sloping supply finds its upward sloping, increasing government borrowing is going to increase the supply from best to ask one of lamentable funds, and you can see that the effect of that is to go from this interest rate here. Teo. This interest rate here, which is a decrease of the answer, is that the interest rate will decrease for part B G warehouse. What happens to investment public, private and national sickening. So investment on public savings air going to decrease My investment is going tio decrease because he's going to decrease because their money is to be set aside to pay off the extra death of the governments to know government's anything with public savings because you can borrow money needs to be set aside in order to pay off the future debts of the government private savings is also going to decrease. Private savings is going to decrease. And this is because the decreasing interest rate disincentivize is people from saving on the size of these changes are going to depend on the relative elasticity, ease of this supply and demand for available funds. The part C is then saying, How does this supply of Vontobel funds are? The elasticity of supply of global funds affect this change? Uh, the answer is there in increasing elasticity going, it was, You know, you must imprison us to city. It's going to lead Tio an increase in everything that we've disgusted parts and be so was basically is going to exacerbate the problem and basically the same thing for party. I'm an increasing elasticity. Eyes also going to exacerbate you're right, exacerbate the problem. So it's going. Teo decreased investment, publicized crimes even even more than if the elasticity was lower. The last part of the question says if the household believes the government will increase taxes to pay for its borrowing and what will be effective to supply of vulnerable spots, Household believes that the government was going to raise taxes in the future to pay for increased borrowing today, the household would increase its same off, which will in turn increase the low noble funds which will further decrease the interest rate. And then the effect will just compound exactly the way that we've been talking about this entire question. So this wass Chapter 26 problem
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