Suppose the government borrows $20 million more next year than this year. How does the elasticity of the supply of loanable funds affect the size of these changes?     How does the elasticity of the demand of loanable funds affect the size of these changes?

Use Figure: The Market for Loanable Funds with Government Borrowing. After an increase in government borrowing, the equilibrium interest rate will rise from 6% to Interest rate (%) 12 10 8 5 4 2 O %, and the amount of private savings will Supply of loanable funds Demand for loanable funds 10 20 30 40 50 60 70 80 90 100 Quantity of loanable funds (billions of dollars)

If there is a rise in the real interest rate, how does the quantity of loanable funds demanded change?

The table shows the demand for loanable funds schedule and the supply of loanable funds schedule when the government budget is balanced. Loanable funds Loanable funds demanded Real interest rate (percent per year) supplied If the govemment budget surplus is $1.0 trillion, what are the real interest rate, the quantity of investment, and the quantity of private saving? (trillions of 2009 dotlars per year) 8.0 6.0 7.5 6.5 If the government budget surplus is $1.0 trillion, the real interest rate is percent a year. 7.0 7.0 6.5 75 If the government budget surplus is S1.0 trillion, the quantity of investment is S trillion, and the quantity of private saving is $ trillion. 6.0 8.0 5.5 8.5 10 5.0 9.0

I Consider a country that produces only wheat and corn. Based on the data in the table, calculate the country's real GDP for year 2008 (assume 2005 as the base year) is: Price of Wheat (per bushel) $56 Quantity of Wheat (million bushels) 1.250 1,360 1,420 1,500 Price of Corn Quantity of Corn Year 2005 2006 2007 2008 (per bushel) $44 (million tons) 910 64 1,050 1,120 1,260 52 72 55 62

The following graph shows the market for loanable funds in a closed economy. The upward-sloping orange line represents the supply of loanable funds, and the downward-sloping blue line represents the demand for loanable funds. INTEREST RATE (Percent) 10 9 8 50 3 2 1 0 Supply Demand 0 100 200 300 400 500 600 700 800 900 1000 LOANABLE FUNDS (Billions of dollars) ? is the source of the supply of loanable funds. As the interest rate rises, the quantity of loanable funds supplied Suppose the interest rate is 4.5%. Based on the previous graph, the quantity of loanable funds supplied is demanded, resulting in a of loanable funds. This would encourage lenders to the quantity of loanable funds supplied and the equilibrium interest rate of % than the quantity of loans the interest rates they charge, thereby the quantity of loanable funds demanded, moving the market toward

Consider the following figure which shows the loanable funds market (where SLF is the supply of loanable funds and DLF is the demand for loanable funds). If the real interest rate is 9 per cent, then a. there is a surplus in the loanable funds market b. there is a shortage in the loanable funds market. c. the demand for loanable funds curve will shift rightward. d. there will be a leftward shift in the demand for loanable funds curve.

In the loanable funds market, if firms become more optimistic about future profitability, then the a demand for loanable funds will increase, interest rates will increase, and private sector investment spending will increase. b demand for loanable funds will decrease, interest rates will decrease, and the equilibrium quantity of borrowing will decrease. c supply of loanable funds will increase, interest rates will decrease, and the equilibrium quantity of borrowing will increase. d supply of loanable funds will increase, interest rates will increase, and private sector investment spending will increase.

Provide two examples of changes in the market for loanable funds that can result in a change in the level of interest rates. Explain how and why the interest rate changes based on the loanable fund theory.

Homework (Ch 23) 5. Impact of budget deficits 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 the financial industry is close to bankruptcy and the U.S. government decides to implement a bailout plan of several billion dollars without increasing 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. INTEREST RATE LOANABLE FUNDS Based on this model, the budget deficit leads to D $ 6 m D/ in the level of investment and in the interest rate.