Construct the market for loanable funds and use it to illustrate and explain each of the following: a) How an increase in the government budget deficit will affect equilibrium interest rate and investment spending of firms, other factors constant b) How an increase in household savings as they become more financial literate will affect equilibrium interest rate and investment spending of firms, other factors constant c) How an increase in business confidence will affect equilibrium interest rate and investment spending of firms, other factors constant.

Construct the market for loanable funds and use it to illustrate and explain each of the following: a) How an increase in the government budget deficit will affect equilibrium interest rate and investment spending of firms, other factors constant b) How an increase in household savings as they become more financial literate will affect equilibrium interest rate and investment spending of firms, other factors constant c) How an increase in business confidence will affect equilibrium interest rate and investment spending of firms, other factors constant.

Exploring Economics

8th Edition

ISBN:9781544336329

Author:Robert L. Sexton

Publisher:Robert L. Sexton

Chapter21: Financial Markets, Saving, And Investment

Section: Chapter Questions

Problem 9P

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Collaboration with Congress during the Clinton Administration allowed for an aggressive deficit-cutting plan to pass. As a result, the government was able to reach a balanced budget at the end of the 90's. Move the supply and/or demand curves to describe the expected effect that this deficit-reduction likely had upon the loanable funds market. As a result, private investment should have a) decreased as the cost of borrowing increased. b) increased as the cost of borrowing increased. c) increased because the cost of borrowing decreased. d) decreased as the cost of borrowing decreased.
Consider the following policy scenarios and for each scenario diagrammatize and fully explain using analysis for the market for loanable funds how the following government policies affect the economy’s saving and investment. (a) Scenario Policy 1: Suppose the government starts with a balanced budget and then, because of a tax cut or spending increase, starts running a budget deficit. (b) Scenario Policy 2: Suppose the government changes the tax code, allowing individuals to reduce their taxable income if they save money in registered retirement savings plans (RRSPs).
Consider the following policy scenarios and for each scenario diagrammatize and fully explain using analysis for the market for loanable funds how the following government policies affect the economy’s saving and investment. [Kindly note: please show Diagram and give Detailed Explanation (a) Scenario Policy 1: Suppose the government starts with a balanced budget and then, because of a tax cut or spending increase, starts running a budget deficit. (b) Scenario Policy 2: Suppose the government changes the tax code, allowing individuals to reduce their taxable income if they save money in registered retirement savings plans (RRSPs)
Collaboration with Congress during the Clinton administration allowed for an aggressive deficit‑cutting plan to pass. At the end of the 1990s, Congress eliminated the government deficit. Manipulate the graph to illustrate how the elimination of the deficit affects the loanable funds market. look at image for graph What does the model predict will happen to the quantity of private investment as a result of elimination of the government deficit? Private investment will increase because the cost of borrowing increases. decrease because the cost of borrowing increases. decrease because the cost of borrowing decreases. increase because the cost of borrowing decreases.
Economists that favor balanced budgets warn against increases in government spending without a corresponding increase in taxes. Modify the graph to illustrate effect of this change to the public budget on the market for loanable funds, according to these economists. Real interest rate Demand Supply X Quantity of loanable funds Select all of the factors that will be reduced as a result of this change in the public budget. labor productivity domestic investment imports capital inflows
The supply and demand curves for loanable funds are affected by different factors. Classify each event according to which curve shifts, if any, and the direction of the shift. an increase in tax breaks a decrease in the productivity of capital an increase in the real interest rate an increase in investor confidence an increase in life expectancy a decrease in the government budget surplus increase in the demand for loanable funds increase in the demand for loanable funds neither curve shifts increase in the demand for loanable funds increase in the supply of loanable funds increase in the demand for loanable funds Answer Bank increase in the supply of loanable funds increase in the demand for loanable funds decrease in the supply of loanable funds decrease in the demand for loanable funds neither curve shifts
Amid the global pandemic, economic activity in many countries in the world decreased substantially causing a significant reduction in tax revenues. Mexico had a projected a budget deficit of $20 billion dollars. Assume that the government of Mexico borrowed $20 billion more from the market for loanable funds. Answer both parts below assuming that Mexico is a closed economy. a) Use a diagram for the market for loanable funds to analyze this policy. Does the interest rate rise or fall? What happens to investment and national saving? Note: make sure you label your diagram properly. b) Suppose households believe that greater government borrowing today implies higher taxes to pay off the government debt in the future. What does this belief do to private saving and the supply of loanable funds today? Does this change the results you discussed in part (a)? + v В I U A 川、 Paragraph
Using a graph representing the market for loanable funds, show and explain what happens to interest rates and investment if a) a reduction in military spending moves the government's budget from deficit into surplus. b) the government raises its tax on corporate profits. Other tax changes also are made, such that the government's deficit remains unchanged. c) a rise in life span of Americans.
Question 4 Consider the following policy scenarios and for each scenario diagrammatize and fully explain using analysis for the market for loanable funds how the following government policies affect the economy’s saving and investment. [Kindly note: Each Diagram must have a detailed Explanation. (a) Scenario Policy 1: Suppose the government starts with a balanced budget and then, because of a tax cut or spending increase, starts running a budget deficit. (b) Scenario Policy 2: Suppose the government changes the tax code, allowing individuals to reduce their taxable income if they save money in registered retirement savings plans (RRSPs).
According to how we model the Loanable Funds market in Ch. 6 (considering household savings and taking (T – G) as government’s net ‘saving,’ which could be negative it there were a budget deficit), which of the following shifts the Supply of Loanable Funds curve to the left? (T = taxes; G = government spending.) Group of answer choices A) higher tax rates on business investment spending B) a change in tastes toward consuming less C) higher budget deficit D) change in tastes toward saving more E) lower budget deficit
Question 4 Consider the following policy scenarios and for each scenario diagrammatize and fully explain using analysis for the market for loanable funds how the following government policies affect the economy’s saving and investment. [Kindly note: Each Diagram, Detailed Explanation (a) Scenario Policy 1: Suppose the government starts with a balanced budget and then, because of a tax cut or spending increase, starts running a budget deficit. (b) Scenario Policy 2: Suppose the government changes the tax code, allowing individuals to reduce their taxable income if they save money in registered retirement savings plans (RRSPs).
The table shows an economy's demand for loanable funds and supply of loanable funds schedules when the government's budget is balanced. The quantity of loanable funds demanded increases by $2.0 trillion at each real interest rate and the quantity of loanable funds supplied increases by $1.0 trillion at each interest rate. If, at the same time the government budget becomes a deficit of $1.0 trillion, what are the real interest rate, the quantity of loanable funds, investment, and saving? >>> Answer to 1 decimal place. Real interest rate (percent per year) Loanable funds Loanable funds demanded supplied (trillions of 2012 dollars per year) 4 7.5 6.5 5 7.0 7.0 6 6.5 7.5 7 6.0 8.0 8 5.5 8.5 9 5.0 9.0 10 4.5 9.5 The real interest rate is 7 percent a year. The quantity of loanable funds is $ trillion, investment is $ trillion, and saving is $ trillion.