Use a diagram of the loanable funds market to illustrate the effect of the following events on the equilibrium interest rate and quantity of loanable funds.
An economy is opened to international movements of capital, and a capital inflow occurs.
Retired people generally save less than working people at any interest rate. The proportion of retired people in the population goes up.
Explain what is wrong with the following statement: “Savings and investment spending may not be equal in the economy as a whole in equilibrium because when the interest rate rises, households will want to save more money than businesses will want to invest.”
Suppose that expected inflation rises from 3% to 6%.
How will the real interest rate be affected by this change?
How will the nominal interest rate be affected by this change?
What will happen to the equilibrium quantity of loanable funds?