The table sets out the data for an economy when the government's budget is balanced. The quantity of loanable funds demanded increases by $1.5 billion at each real interest rate and the quantity of loanable funds supplied increases by $0.5 billion at each interest rate If, at the same time the government budget becomes a deficit of $1.0 billion, what are the real interest rate and investment? Does any crowding out occur? >>> Answer to 1 decimal place. The real interest rate is Investment is $ billion. There O A. is, percent a year. crowding out in this situation because the deficit increases the real interest rate, which decreases investment OB. is no; investment is $7.0 billion Real interest rate (percent per year) 4 5 6 7 8 9 10 Loanable funds Loanable funds supplied demanded (billions of 2007 dollars) 8.0 7.5 7.0 6.5 6.0 5.5 5.0 7766518 5.0 5.5 6.0 6.5 7.0 7.5 8.0

The table sets out the data for an economy when the government's budget is balanced. The quantity of loanable funds demanded increases by $1.5 billion at each real interest rate and the quantity of loanable funds supplied increases by $0.5 billion at each interest rate If, at the same time the government budget becomes a deficit of $1.0 billion, what are the real interest rate and investment? Does any crowding out occur? >>> Answer to 1 decimal place. The real interest rate is Investment is $ billion. There O A. is, percent a year. crowding out in this situation because the deficit increases the real interest rate, which decreases investment OB. is no; investment is $7.0 billion Real interest rate (percent per year) 4 5 6 7 8 9 10 Loanable funds Loanable funds supplied demanded (billions of 2007 dollars) 8.0 7.5 7.0 6.5 6.0 5.5 5.0 7766518 5.0 5.5 6.0 6.5 7.0 7.5 8.0

MACROECONOMICS

14th Edition

ISBN:9781337794985

Author:Baumol

Publisher:Baumol

Chapter11: Managing Aggregate Demand: Fiscal Policy

Section: Chapter Questions

Problem 1DQ

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Which of the following policy actions wouldunambiguously reduce the supply of loanable fundsand crowd out investment?a. an increase in taxes and a decrease ingovernment spendingb. a decrease in taxes together with an increase ingovernment spendingc. an increase in both taxes and governmentspendingd. a decrease in both taxes and government spending
The table shows the demand for loanable funds schedule and the supply of loanable funds schedule when the govemment budget is balanced. If the government budget deficit is $1.0 trillion, what are the real interest rate, the quantity of investment, and the quantity of private saving? Is there any crowding out in this situation? HEITI If the government budget deficit is $1.0 trillion, the real interest rate is percent a year If the government budget deficit is $1.0 trillion, the quantity of investment is $ trillion, and the quantity trillion. of private saving is $ S Is there any crowding out in this situation? OA. Yes. The deficit increases the real interest rate, which decreases investment. GELOO Real interest rate (percent per year) 4 677997 8 10 4 Loanable funds Loanable funds demanded supplied (trillions of 2012 dollars per year) 8.5 8.0 05 77761 7.5 7.0 6.5 05 6.0 5.5 5.5 6.0 6.5 7.0 7.5 8.0 8.5 6770 00
In the figure to the right, the leftward shift from the demand for loanable funds curve DLF, to the demand for loanable funds curve DLF3, could be the result of OA the economy entering a recession. OB. a increase in interest rates during an economic expansion. OC. a government budget surplus. O D. a decrease in interest rates during an economic recession. O E. the economy entering an expansion. Real interest rate (percent per year) 10- 8 0 I DLF, DLF₂ DLF3 1.5 2.0 2.5 3.0 3.5 Loanable funds (trillions of 2005 dollars)
Suppose a given hypothetical economy has the following values. GDP-520 Billion, Consumption =$13 Billion; Govermment Purchase-$4 Billion; and Budget Surplus = $1 Billion How much is the public saving? OA S5 Bilion OB $4 Blion OC.52 Billion OD-$1 Billion OE S1 Billion OF $3 Billion
Refer to the figure below to answer the following questions. Real interest rate (percent per year) 4 3 2 1 O Private saving is $ PSLF 15 20 25 Loanable funds (billions of 2007 dollars) Investment is $ In the situation above the government has a budget SLF saving is $25 billion. DLF billion. billion and national
Use the analysis for the market for loanable funds diagram to illustrate and explain how thefollowing government policy affect the economy’s saving and investment. Policy 1: Suppose thegovernment changes the tax code, allowing individuals to reduce their taxable income if they savemoney in registered retirement savings plans (RRSPs). Your response should answer the following questions:a. State and explain which loanable funds curve would this policy affect? b. Which way would the loanable funds curve shift? c. What would be the impact on interest rates? Draw the loanable funds diagram to illustrate your answers for a to c.
On the following graph, show the impact of the increase in government purchases on the interest rate by shifting one or both of the curves. Supply X Demand 2 10 20 30 40 50 QUANTITY OF LOANABLE FUNDS (Billions of dollars) 12 IN TEREST RATE 10 0 0 60 ģ Demand Supply ? Suppose that for each one-percentage-point increase in the interest rate, the level of investment spending declines by $1.25 billion. by According to the change you made to the loanable funds market in the previous scenario, the increase in government purchases causes the interest rate in the money market to from 6% to %. The change in the interest rate causes the level of investment spending to $ billion. by After the multiplier effect is accounted for, the change in investment spending will cause the quantity of output demanded to $ billion at each price level. The impact of an increase in government purchases on the interest rate and the level of investment spending is known as the effect. Place the purple line (diamond…
K In the figure to the right, the leftward shift from the demand for loanable funds curve DLF, to the demand for loanable funds curve DLF3, could be the result of O A. the economy entering a recession. B. the economy entering an expansion. O C. a decrease in interest rates during an economic recession. O D. a government budget surplus. O E. a increase in interest rates during an economic expansion. Real interest rate (percent per year) 10 8 6 4 2 0 DLF₁ DLF₂ DLF3 1.5 2.0 2.5 3.0 3.5 Loanable funds (trillions of 2005 dollars)
HOw wil his change the Scenario 2: The government increases deficit spending by $100 Billion dollars to invest in green energy throughout the country. 1.What effect will this have on the demand for loanable funds? 2. What effect will this change have on the interest rate? 3. How will this change the behavior of consumers? Scenario 3: Unemplovment decreases throughoutthe country causing a dramaticincrease in
GDP $0 1 2 Consumption $0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 D 8 4.5 As shown in Exhibit 9-1, if equilibrium GDP is $5 trillion, then the total of investment, government spending, and net exports is: 8 4.5 As shown in Exhibit 9-1, if equilibrium GDP is $5 trillion, then the total of investme O $1 trillion. $2 trillion. O $3 trillion. O $4 trillion. $6 trillion. 4 Aggregate Expenditures 6 Unplanned inventory
Economics In the figure, the DLF curve is the demand for loanable funds curve and the PDLF curve is the private demand for loanable funds curve. If there is no Ricardo-Barro effect, the figure Real interest rate (percent per year) 12- shows the situation in which the government has a so that the equilibrium real interest rate is equilibrium quantity of investment is 10- and the SLF 8- O A. budget deficit; 6 percent; $1.5 trillion B. budget deficit; 4 percent; $1 trillion 6- OC. budget surplus; 6 percent; $1.5 trillion D. budget surplus; 4 percent; $1 trillion E. balanced budget; 6 percent; $1.5 trillion 2- DLF PDLF 0- 2.0 Loanable funds (trillions of 2012 dollars) 0.5 1.0 1.5 2.5 3.0 O O O O O
Typically we might expect higher government spending to crowd out private invest- explain the rationale for this expected relationship. ment.