Economics The table shows an economy's demand for loanable funds schedule and supply of loanable funds schedule when the government's budget is balanced Real interest rate Loanable funds demanded Loanable funds supplied (percent per year) (trillions of 2010 dollars) (trillions of 2010 dollars) 12 6 4 11 7 10 8 6 9 7 8 10 7 11 If the Ricardo-Barro effect occurs, and if the government budget deficit is $2 trillion, the real interest rate is percent a year and the quantity of investment is_ trillion. O A. 7.0, $8.0 O B. 7.0; $10 0 OC. 5.0; $10.0 OD. 6.0, $9.0

There is $10 trillion in the loanable funds market.  $6 trillion in private borrowing and $4 trillion in government borrowing.  The federal government increases its borrowing to $5 trillion, crowding out $1 trillion in private borrowing.  Interest rates remain the same.  Make an argument that the GDP remains the same and that we don’t care about the crowding out.

The graphs below depict the loanable funds market and the relationship between real interest rates and the level of net capital outflow (NCO) calculated in terms of the Mexican peso. REAL INTEREST RATE (Percent) 8 8 10 3 1 The Market for Loanable Funds in Mexico + 0 1 2 3 4 Supply Demand 5 6 LOANABLE FUNDS (Billions of pesos) Initial state After capital flight 7 8 (?) REAL INTEREST RATE (Percent) Complete the first row of the table to reflect the state of the markets in Mexico. Real Interest Rate Net Capital Outflow (NCO) (Percent) (Billions of pesos) Mexican Net Capital Outflow 8 7 6 10 5 4 3 2 NÇO + # -3 -2 -1 0 1 2 3 4 5 NET CAPITAL OUTFLOW (Billions of pesos) 6 (?) Suppose now that a sudden bout of political turmoil in Mexico causes world financial markets to become uneasy. Because investors now see Mexico as unstable, they decide to pull a portion of their assets out of Mexico and put them into more stable economies. This unexpected shock to the demand for assets in Mexico is…

1) Using a graph representing the market for loanable funds, show and explain what happens to interest rates and investment if: a reduction in military spending moves the government’s budget from deficit into surplus. Note:- Do not provide handwritten solution. Maintain accuracy and quality in your answer. Take care of plagiarism. Answer completely. You will get up vote for sure.

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5. The market for loanable funds and government policy The following graph shows the market for loanable funds. For each of the given scenarios, adjust the appropriate curve on the graph to help you complete the questions that follow. Treat each scenario separately by resetting the graph to its original state before examining the effect of each individual scenario. (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 (?) Scenario 1: Individual Retirement Accounts (IRAS) allow people to shelter some of their income from taxation. Suppose the maximum annual contribution to such accounts is $5,000 per person. Now suppose there is a decrease in the maximum contribution, from $5,000 to $3,000 per year.

17. What makes up the supply curve in the loanable funds market? Why does this curve have a positive relationship with the real interest rate?

4. 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.) Supply 17 INTEREST RATE (Percent) LOANABLE FUNDS (Billions of dollars) Demand Scenario 1: Suppose savers either buy bonds or make deposits in savings accounts at banks. Initially, the interest income earned on bonds or deposits is taxed at a rate of 18%. Now suppose there is an increase in the tax rate on interest income, from 18% to 22%. Shift the appropriate curve on the graph to reflect this change. The repeal of the previously existing tax credit causes the interest rate to Shift the appropriate curve on the graph to reflect this change. This change in the tax…

INTEREST RATE (Percent) Demand LOANABLE FUNDS (Billions of dollars) Supply Scenario 1: Suppose savers either buy bonds or make deposits in savings accounts at banks. Initially, the interest income earned on bonds or deposits is taxed at a rate of 20%. Now suppose there is an increase in the tax rate on interest income, from 20% to 25%. Demand Shift the appropriate curve on the graph to reflect this change. This change in the tax treatment of interest income from saving causes the equilibrium interest rate in the market for loanable funds to and the level of investment spending to Shift the appropriate curve on the graph to reflect this change. The implementation of the new tax credit causes the interest rate to Supply Scenario 2: An investment tax credit effectively lowers the tax bill of any firm that purchases new capital in the relevant time period. Suppose the government implements a new investment tax credit. This change in spending causes the government to run a budget Shift the…