The following graph shows the market for loanable funds before the additional bo

Question

The following graph shows the market for loanable funds before the additional borrowing for next year. Use the orange line (square point) to graph the new supply of loanable funds as a result of this government policy to borrow $20 billion more next year than this year. indicate whether each of the following economy components rises of falls as a result of this policy change. Then determine if the magnitude of this change is less than,more than, or equel tom the $20 of bextra government borrowing. A more elastic supply of loanable funds would result in the interest rate rising by________and,thus, national saving falling by________Amore elastic demand for loanable funds would results in the interest rate raising_____________and,thus,natiopnal saving falling by_____.Suppose households believe that greater government borroweing today implies higher taxes to pay off the government debt in the future. This believe causes people to save_______today,which__________private saving and_____the supply of loanable funds. This will_______the effect of the reduction in public saving on the market for loanable funds.

Explanation / Answer

Answer will be equilibrium at 4% interest rate and 60 billion dollars will be the loanable funds because as the government borrows new fund it will spend that funds which will increase money supply by 20 billion dollars . This will shift the supply curve on the right side and led to meet the money demand at (4, 60).

Hence this will become new equilibrium point for the economy.

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