3. Effects of a government budget deficitSuppose a hypothetical open economy uses the U.S. dollar as currency. The table below presents data describing the relationship between different real interest rates and this economy’s levels of national saving, domestic investment, and net capital outflow. Assume that the economy is currently operating under a balanced government Given the information in the table above, use the blue points (circle symbol) to plot the demand for loanable funds. Next, use the orange points(square symbol) to plot the supply of loanable funds. Finally, use the black point (cross symbol) to indicate the equilibrium in this market.REAL INTEREST RATE108200Market for Loanable Funds204060QUANTITY OF LOANABLE FUNDS80100DemandSupply+Equilibrium? 3. Effects of a government budget deficitSuppose a hypothetical open economy uses the U.S. dollar as currency. The table below presents data describing the relationship between differentreal interest rates and this economy's levels of national saving, domestic investment, and net capital outflow. Assume that the economy is currentlyoperating under a balanced government budget.Real Interest Rate(Percent)765432National Saving(Billions of dollars)403530252015Domestic Investment(Billions of dollars)303540455055Net Capital Outflow(Billions of dollars)-20-15-10-505

Public reserve funds of the economy It is a savings account or highly liquid assets placed aside to…

Suppose a hypothetical open economy uses the U.S. dollar as currency. The table below presents data describing the relationship between different real interest rates and this economy’s levels of national saving, domestic investment, and net capital outflow. Assume that the economy is currently operating under a balanced government

Suppose a hypothetical open economy uses the U.S. dollar as currency. The table below presents data describing the relationship between different real interest rates and this economy’s levels of national saving, domestic investment, and net capital outflow. Assume that the economy is currently operating under a balanced government

Microeconomics

13th Edition

ISBN:9781337617406

Author:Roger A. Arnold

Publisher:Roger A. Arnold

Chapter16: Interest, Rent, And Profit

Section: Chapter Questions

Problem 3QP

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3. Effects of a government budget deficit

Given the information in the table above, use the blue points (circle symbol) to plot the demand for loanable funds. Next, use the orange points
(square symbol) to plot the supply of loanable funds. Finally, use the black point (cross symbol) to indicate the equilibrium in this market.
REAL INTEREST RATE
10
8
2
0
0
Market for Loanable Funds
20
40
60
QUANTITY OF LOANABLE FUNDS
80
100
Demand
Supply
+
Equilibrium
?

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In the market for loanable funds, there is a demand and supply of loanable funds represent as the following equations Demand:r 10.4-0.003Q Supply r=0.005Q What is the equilibrium interest rate in the market? You only need to provide the number and you do not need to multiply by 100% Instructions if the answer is not a whole number you should leave two numbers after the decimal Eg If the answer is 10.2778 it can be entered as 10.29 if negative write-10.28 Answer
Predict how each of the following economic changes will affect the equilibrium price and quantity in the financial market for home loans. Sketch a demand and supply diagram to support your answers. Because of a threat of war, people become uncertain about their economic future. The overall level of saving in the economy diminishes. The federal government changes its bank regulations in a way that makes it cheaper and easier for banks to make home loans.
Scenario 1: Individual Retirement Accounts (IRAs) allow workers to shelter a portion of their income from taxation. Suppose the maximum annual contribution to accounts of this type is $6,000 per person. Now suppose there is an increase in the maximum contribution, from $6,000 to $9,000 per year. Shift the appropriate curve on the graph to reflect this change. This change in the tax treatment of saving causes the equilibrium interest rate in the market for loanable funds tofall and the level of investment spending toincrease . Scenario 2: An investment tax credit effectively lowers the tax bill of any firm that purchases new capital within some relevant time period. Suppose the government implements a new investment tax credit. Shift the appropriate curve on the graph to reflect this change. The implementation of the new tax credit causes the interest rate tofall and the level of saving tofall . Scenario 3: Initially, the government's budget is balanced; then…
Consider a loanable funds market of Pakistan. Suppose, if government want to implement the policy to provide incentives on savings by allowing people to shield their savings by opening Retirement Accounts with commercial banks. What is the effect of this policy on the market for loanable finds Interest rate will (Please write one word either increase or decrease ) Quantity of loanable funds will(Please write one word either increase or decrease) Now assume, the parliament passed a tax reform aimed at making investment more attractive—for instance, by instituting an investment tax credit. An investment tax credit gives a tax advantage to any firm building a new factory or buying a new piece of equipment What is the effect of this policy on the market for loanable finds Interest rate will (Please write one word either increase or decrease) Quantity of loanable funds will((Please write one word either increase or decrease)
The table below shows the amount of savings and borrowing in a market for loans to purchase homes, measured in millions of dollars, at various interest rates. InterestRate QuantitySupplied QuantityDemanded5% 98 2216% 129 1917% 160 1608% 178 1429% 196 12410% 214 106 What is the equilibrium interest rate and quantity of loaned funds? r = % Q = Suppose there is a decrease in demand of money, what will happen to interest rates and quantity? Increase in Interest Rates, Increase in Quantity?Increase in Interest Rates, Decrease in Quantity?Decrease in Interest Rates, Increase in Quantity?Decrease in Interest Rates, Decrease in Quantity?
3) Consider the loanable funds market. Use the following supply and demand equations to answer the questions below. Assume that r is measured as a percentage and Q is the quantity of loans measured in billions. r = 20 - .006Q" r= .5+.004Q$ a) Assume that ↑ – G = 0, find the equilibrium interest rate and quantity of loans. b) Show equilibrium graphically, label all axes and intercepts. c) Suppose that T – G = -600 and the government borrows the entire amount domestically. Find the new demand equation for loanable funds. d) Find the new interest rate and quantity of loans.
8- Describe how the following statements affect either the supply or the demand for loanable funds. For each statement below, do the following: Explain whether the event affects either the demand or the supply of loanable funds. Describe how the statement will affect the equilibrium interest rate and quantity of loanable funds. Draw a graph to demonstrate each answer. Please remember to label each part of the graph. Indicate the change in the interest rate and the quantity of loanable funds on your graph. Analyze each event independently. (Hint: Review the slides and recordings of Lecture 4 for similar graphical analysis). Statements: a) "The national-level saving rate is important from a macroeconomic perspective, in the sense that higher savings tend to strengthen the economy over the long run." b) “Slow-trend growth is reducing the opportunities for profitable long-term investments. The recent downturn in business investment was less of a cyclical blip than a sign of things to…
Suppose the government borrows $20 million more next year than this year. How does the elasticity of the supply of loanable funds affect the size of these changes? How does the elasticity of the demand of loanable funds affect the size of these changes?
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Applied to the loanable funds market, the Law of Supply dictates that.. A)Lenders will seek to offer more loans to potential borrowers at higher interest rates than lower ones B)Lenders will seek to offer more loans to potential borrowers at lower interest rates than higher ones C)Borrowers will seek to acquire more loans at higher interest rates than lower interest rates.
5. The market for loanable funds and government policy The following graph shows the loanable funds market. For each of the given scenarios, adjust the appropriate curve on the graph to help you complete the questions that follow. Consider each scenario separately by returning the graph to its starting position when moving from one scenario to the next. (Note: You will not be graded on any changes you make to the graph.) INTEREST RATE (Percent) Supply Demand LOANABLE FUNDS (Billions of dollars) Demand Supply ?
INTEREST RATE (Percent) 12 11 10 9 co 5 4 3 2 1 0 Supply Demand 0 100 200 300 400 500 600 700 800 900 1000 1100 1200 LOANABLE FUNDS (Billions of dollars) ? Investment is the source of the supply of loanable funds. As the interest rate falls, the quantity of loanable funds supplied decreases Suppose the interest rate is 5.5%. Based on the previous graph, the quantity of loanable funds supplied is greater than the quantity of loans demanded, resulting in a surplus of loanable funds. This would encourage lenders to lower the interest rates they charge, thereby decreasing the quantity of loanable funds supplied and increasing the quantity of loanable funds demanded, moving the market toward the equilibrium interest rate of 5%