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Question 1 of 1

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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) in the of loanable funds. Reducing deficits to zero will cause interest rates to .

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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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) in the of loanable funds. This will cause the interest rate to .

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.”

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 of loanable funds will . This will cause interest rates to .

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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