9. Suppose a fiscal stimulus package that called for a large increase in governm

Question

9. Suppose a fiscal stimulus package that called for a large increase in government spending actually increases governments budget deficit dramatically

a. When the government runs a larger budget deficit, dose that shit the demand curve or the supply curve for loanable funds?

b. Use a supply-and-demand diagram for loanable funds to show in which direction the relevant curve shifts.

c. According to the loanable funds framework, does the interest rate rise or fall as a result of the larger budget deficit?

d. According to the loanable funds framework, does national saving rise or fall as a result of the larger budget deficit? e. According to the loanable funds framework, does investment rise or fall as a result of the larger budget deficit?

e. According to the loanable funds framework, does investment rise or fall as a result of the larger budget deficit?

Explanation / Answer

a. yes, the demand curve shifts from left to right, it means demand for funds increases.

c. the interest rates are increased, because the demand for funds increased and supply is less.

d. if the interest rates increased it supports to higher savings.

e. the investment falls, because majority of the funds will be struck at government hands, private people may not hold sufficient funds.

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