Homework (Ch 18) Due on Dec Sat 2 PM EST 5. The market for loanable funds and go
ID: 1118965 • Letter: H
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Homework (Ch 18) Due on Dec Sat 2 PM EST 5. The market for loanable funds and government policy shows the market for loanable funds. For each of the given scenarios, adjust the appropriate curve on the graph to help you g the graph to its original state before examining the effect of each complete the questions that follow. Treat each scenario separately by resettin individual scenario. (Note: You will not be graded on any changes you make to the graph.) Demand Supply LOANABLE FUNDS (Billions of dollars)Explanation / Answer
Understand supply of loanable funds as savings and demand as investment. Any change in policy that affects saving or investment behaviour would shift these curves and change equilibrium level of interest rate ( let's call it 'i').
Scenario 1: People are able to save more now.So supply curve will shift rightward and result in lower i and higher investment spending in the equilibrium. Reason being more savings means more amount of loanable funds available which will drive down the interest rate. when i decreases, investment becomes cheaper, so would rise.
Scenario 2: Investment credit was making the investment cheaper and incentivising higher investment. When this policy is removed, investment would be discouraged. So demand for loanable funds would decrease. This would shift the demand curve to left. Result: i will be lower and equilibrium savings will also be lower. Reason is that lower i would give incentive to consume more rather than save.
Scenario 3: Clearly govt expenditure would increase without any increase in taxes. This would lead to govt budget deficit, and in order to finance this, govt national savings would decrease.
This would shift supply curve leftwards, Increasing i and decreasing investment spending at equilibrium. Reason is that higher i makes investment costlier.
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