A national newspaper’s headline reads “Business Confidence Reaches Highest Level in 5 Years.” (a) Draw a correctly labeled graph of the loanable funds market, and show the effect of high business confidence on the equilibrium real interest rate. (b) Assume the government increases its spending on capital projects and infrastructure. Would financing the increased government spending by borrowing result in a higher, a lower, or the same equilibrium real interest rate? Explain. (c) How will the increase in government spending financed by borrowing affect national savings
A national newspaper’s headline reads “Business Confidence Reaches Highest Level in 5 Years.”
(a) Draw a correctly labeled graph of the loanable funds market, and show the effect of high business confidence on the equilibrium real interest rate.
(b) Assume the government increases its spending on capital projects and infrastructure. Would financing the increased government spending by borrowing result in a higher, a lower, or the same equilibrium real interest rate? Explain.
(c) How will the increase in government spending financed by borrowing affect national savings?
(d) If the expected inflation rate decreases to zero, will the nominal interest rate be greater than, less than, or equal to the real interest rate? Explain.
Trending now
This is a popular solution!
Step by step
Solved in 3 steps with 1 images
