Chapter 1. Chapter 25

Step 1

Work It Out
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You must read each slide, and complete any questions on the slide, in sequence.

Question

Use the market for loanable funds shown in the accompanying diagram to explain what happens to private savings, private investment spending, and the interest rate if each of the following events occur. Assume that there are no capital inflows or outflows.

a. If the government reduces the size of its deficit to zero there will be a(n) ihyXI3vweKBVkqtuOIeAYqcmI9iXy7Xh in the ydtncxPy4jWPZjitV933hu/nI3I= of loanable funds. Reducing deficits to zero will cause interest rates to u/Bo3/Gu/P09VZ6/Dkn0NQ==.

Sorry, if the government reduces its deficit to zero, there will be a decrease in the demand for loanable funds equal to the reduction in the size of the deficit. In response to the decrease in demand, the interest rate falls. For further review see section, “The Loanable Funds Market.”
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Question

Use the market for loanable funds shown in the accompanying diagram to explain what happens to private savings, private investment spending, and the interest rate if each of the following events occur. Assume that there are no capital inflows or outflows.

b. At any given interest rate, if consumers decide to save more and the government budget remains unchanged there will be a(n) Z5/pDly332AjV3TKqM8FMDiwwqSIBbJS in the PuLKO2w5dBBF8OuAiN09YfUEOv8= of loanable funds. This will cause the interest rate to u/Bo3/Gu/P09VZ6/Dkn0NQ==.

Sorry, if consumers decide to save more, there will be an increase in the supply of loanable funds (a rightward shift). The increase in the supply of loanable funds reduces the equilibrium interest rate.For further review see section, “The Loanable Funds Market.”

Question

Use the market for loanable funds shown in the accompanying diagram to explain what happens to private savings, private investment spending, and the interest rate if each of the following events occur. Assume that there are no capital inflows or outflows.

c. At any given interest rate, if businesses become very optimistic about the future profitability of investment spending and the government budget remains unchanged then the Glw+rSDuFZhvxn7epPgdMM0oWlU= of loanable funds will Z5/pDly332AjV3TKqM8FMDiwwqSIBbJS. This will cause interest rates to TuJN6iTS2KGBP4jBi/sn7g==.

Sorry, higher investment spending at any given interest rate leads to an increase in the demand for loanable funds (rightward shift). The increase in the demand for loanable funds shifts the demand curve to the right and raises the equilibrium interest rate. For further review see section, “The Loanable Funds Market.”
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