Loanable Funds ABLE FUNDS Demand Shifters Changes in

Loanable Funds

ABLE FUNDS Demand Shifters • Changes in business opportunity • Change in govt. Behavior (REMEMBER – govt. is a borrower) Supply Shifters • Change in savings habits • Change in capital inflows

Draw a properly labeled loanable funds graph

Interest rate Draw a properly labeled loanable funds graph Slf E Dlf Quantity of loanable funds

In each of the situations given: Interest rate • First decide will it shift supply or demand • Second decide if it will be an increase or decrease NOW – change the graph accordingly. Based on the new graph • What happened to equalibrium interest rate? • What happened to equalibrium quantity of loanable funds? Slf E Dlf Quantity of loanable funds

• First decide will it shift supply or demand • Second decide if it will be an increase or decrease NOW – change the graph accordingly. Based on the new graph • What happened to equalibrium interest rate? • What happened to equalibrium quantity of loanable funds? There is an increase in capital inflows into the country.

R Q lf Interest rate • First decide will it shift supply or demand • Second decide if it will be an increase or decrease NOW – change the graph accordingly. Based on the new graph • What happened to equalibrium interest rate? • What happened to equalibrium quantity of loanable funds? Slf S 1 E Dlf Quantity of loanable funds

• First decide will it shift supply or demand • Second decide if it will be an increase or decrease NOW – change the graph accordingly. Based on the new graph • What happened to equalibrium interest rate? • What happened to equalibrium quantity of loanable funds? The government reduces the government deficit

R Q lf Interest rate • First decide will it shift supply or demand • Second decide if it will be an increase or decrease NOW – change the graph accordingly. Based on the new graph • What happened to equalibrium interest rate? • What happened to equalibrium quantity of loanable funds? Slf E D 2 Dlf Quantity of loanable funds

• First decide will it shift supply or demand • Second decide if it will be an increase or decrease NOW – change the graph accordingly. Based on the new graph • What happened to equalibrium interest rate? • What happened to equalibrium quantity of loanable funds? There is an increase in private savings

R Q lf Interest rate • First decide will it shift supply or demand • Second decide if it will be an increase or decrease NOW – change the graph accordingly. Based on the new graph • What happened to equalibrium interest rate? • What happened to equalibrium quantity of loanable funds? Slf S 1 E Dlf Quantity of loanable funds

• First decide will it shift supply or demand • Second decide if it will be an increase or decrease NOW – change the graph accordingly. Based on the new graph • What happened to equalibrium interest rate? • What happened to equalibrium quantity of loanable funds? There is decrease in perceived business opportunities

R Q lf Interest rate • First decide will it shift supply or demand • Second decide if it will be an increase or decrease NOW – change the graph accordingly. Based on the new graph • What happened to equalibrium interest rate? • What happened to equalibrium quantity of loanable funds? Slf E D 2 Dlf Quantity of loanable funds

When the government runs a deficit, this shifts the a. Supply of loanable funds curve to the right. b. Supply of loanable funds curve to the left. c. Demand for loanable funds curve to the right. d. Demand for loanable funds curve to the left.

2. Assume that the loanable funds market in Country X is currently in equilibrium. (a) Draw a correctly labeled graph of the loanable funds market for Country X, and label the equilibrium interest rate as r* and the quantity of funds as QF*

Interest rate Slf r* Dlf QF* Quantity loanable funds

2. Assume that the loanable funds market in Country X is currently in equilibrium. (a) Draw a correctly labeled graph of the loanable funds market for Country X, and label the equilibrium interest rate as r* and the quantity of funds as QF* (b) Assume that the government of Country X, which had a balanced budget, now increases its spending while holding taxes constant. Assume that the government funds the increase in spending with increased borrowing. (i) What will be the impact of this policy action on the government’s budget balance? There will be a budget deficit

(b) Assume that the government of Country X, which had a balanced budget, now increases its spending while holding taxes constant. Assume that the government funds the increase in spending with increased borrowing. (i) What will be the impact of this policy action on the government’s budget balance? There will be a budget deficit (ii) On your graph in part (a), show the impact of this policy action on the interest rate and quantity of funds

Interest rate Slf r 1 r* D 1 Dlf QF* QF 1 Quantity loanable funds

(c) Given your answer in part (b) (ii), how will private-sector interest-sensitive expenditures be affected?

Interest rate (c) Given your answer in part (b) (ii), how will private-sector interestsensitive expenditures be affected? Slf r 1 r* D 1 Higher interest rates will reduce consumption and especially investment spending. Government spending crowds out private spending Dlf QF* QF 1 Quantity loanable funds

(d) Given your answer in part (c), what will be the impact on the long-run growth rate of the economy? The growth rate for the economy will decrease because there will be less investment in capital. Slowing the growth of capital will slow economic growth in general