The table shows an economy\'s demand for loanable funds schedule and supply of l

Question

The table shows an economy's demand for loanable funds schedule and supply of loanable funds schedule when the government's budget is balanced.

What is the real interest rate, the quantity of investment, and the quantity of private saving if the government's budget becomes a surplus of

$1.0 trillion? Is there any crowding out in this situation?

If the government budget surplus becomes 1.0 trillion, the real interest rate is ______ percent a year, the quantity of investment is $______ trillion, and the quantity of private saving is $_________ trillion.

Real Interest Rate Loanable funds demanded Loanable funds supplied 4 7.0 5.0 5 6.5 5.5 6 6.0 6.0 7 5.5 6.5 8 5.0 7.0 9 4.5 7.5 10 4.0 8.0

Explanation / Answer

When the government has a budget surplus it reduces interest rates in the economy .Which means that government is at a better position to induce investment at lower interest rates .Low interest rates induces more private investment and does not lead to crowding out because government is spending and borrowing to meet its deficit . At $1 trillio surplus the interst rates will be 5% with investment demand of 6.5 trillion and saving of 5.5 trillion .

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