INTEREST RATE The following graph shows the loanable funds market in the United States. It plots both the demand (D) for loanable funds and the supply (S) of loanable funds. At the current equilibrium, the government is operating with a balanced budget. Assume now that concerns regarding resources available to public educators lead the government to increase education spending without raising taxes, causing a budget deficit. Show the effect of the budget deficit on the market for loanable funds by shifting the demand (D) curve, the supply (S) curve, or both. LOANABLE FUNDS Based on this model, the budget deficit leads to D S 1 D S in the level of investment and in the interest rate. Which of the following arguments might a supporter of a balanced budget make in defense of their position? Check all that apply. Budget deficits crowd out private investment. ☐ Budget deficits place a burden on future taxpayers. ☐ Budget deficits decrease national saving. ☐ A decrease in spending today, such as funding cuts in education, may hurt future generations more. Supporters of a balanced budget claim that the government's budget deficit cannot grow forever, but critics believe that this is not necessarily true. They argue that what matters is the size of debt relative to national income. For example, suppose that real output in the United States grows at approximately 6%. If the inflation rate is 3% per year, this means that nominal income must be growing at a rate of % per year. Because nominal income grows over time, the nation's ability to pay back the national debt also rises. Therefore, as long as the nation's income grows than the government debt, the level of debt can continue to increase without harming the economy. In this case, the nominal government debt can rise by % each year without increasing the debt-to-income ratio.

What is the main reason for employing contractionary fiscal policy in a time of strong economic growth?

Real Interest Rate S2 5% D Loanable Funds $1,000 (in billions of dollars) The figure depicts a demand-for-loanable-funds curve and two supply-of-loanable-funds curves. Which of the following events would shift the supply curve from S1 to S2? Government goes from running a balanced budget to running a budget surplus. O In response to decreased tax incentives, firms invest more than they previously invested. O In response to increased tax incentives firms invest less than they previously invested. O In response to tax reform, households are motivated to save less than they previously saved.

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 OA. is, HI percent a year crowding out in this situation because OB. is no the deficit increases the real interest rate, which decreases investment investment is $7.0 billion Real interest rate (percent per year) 4 5 6 7 8 9 10 Loanable funds Loanable funds demanded supplied (billions of 2007 dollars) 8.0 7.5 7.0 6.5 6.0 5.5 5.0 5.0 5.5 6.0 6.5 7.0 7.5 8.0

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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 C ... percent a year. Investment is $ billion. There crowding out in this situation because O A. is; OB. is no; the deficit increases the real interest rate, which decreases investment investment is $6.5 billion. Real interest rate (percent per year) 4 5 6 7 8 9 10 Loanable funds Loanable funds supplied demanded (billions of 2007 dollars) 7.5 7.0 6.5 6.0 5.5 5.0 4.5 4.5 5.0 5.5 6.0 6.5 7.0 7.5

If the government's budget changes to a surplus of $2.0 trillion, the real interest rate is _______ percent a year. >>> Answer to 1 decimal place.

The table sets out the data for an economy when the government's budget is balanced. Real Loanable funds Loanable funds interest rate If the government's budget becomes a deficit of $1.0 billion, what are the real demanded supplied (percent per year) interest rate and investment? (billions of 2007 dollars) 4 7.5 4.5 Does crowding out occur? 7.0 5.0 6.5 5.5 ..... If the government's budget becomes a deficit of $1.0 billion, the real interest rate is 7 6.0 6.0 percent a year and the quantity of investment is $ >>> Answer to 1 decimal place. billion. 8 5.5 6.5 9. 5.0 7.0 10 4.5 7.5

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

Adjust the graph to show how a $25.8 billion dollar increase in the government's budget deficit affects the hypothetical loanable funds market below, holding all else equal. Market for Loanable Funds Select the answer that describes the adjustment in the loanable funds market. O The deficit decreases the demand for loanable funds and shifts the demand curve to the left; decreasing the interest rate and crowding out investment spending. O The deficit decreases national savings and shifts the supply curve to the left; increasing the interest rate and crowding out investment spending. O The deficit increases the demand for loanable funds and shifts the demand curve to the right; increasing the interest rate and crowding out investment spending. O The deficit increases national savings and shifts the supply curve to the right; decreasing the interest rate and crowding out investment spending. D Quantity of loanable funds (billions of $) Interest rate