Economics For Today
9th Edition
ISBN: 9781305507074
Author: Tucker, Irvin B.
Publisher: Cengage Learning,
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Question
Chapter 23, Problem 5SQ
To determine
Correct the statement regarding the effect of an increase in national debt on Country U’s economy.
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The graph shows the private demand for loanable funds curve and the supply of
loanable funds curve.
Draw a curve that shows the effect on the loanable funds market when the
government has a budget deficit.
Label it C₁.
Draw a curve that shows the Ricardo-Barro effect on the loanable funds market.
Label it C₂.
Draw a point at the new real interest rate and quantity of loanable funds.
The Ricardo-Barro effect
crowding out.
Click the graph, choose a tool in the palette and follow the instructions to create your graph.
10
8-
6-
4-
2-
Real interest rate (percent per year)
SLF
PDLF
Loanable funds (trillions of 2009 dollars)
>>> Draw only the objects specified in the question.
How does tax cuts encourage saving and investment
The Washington Post'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 0, will the nominal interest rate be greater than, less than, or equal to the real interest rate? Explain.
Chapter 23 Solutions
Economics For Today
Ch. 23.3 - Prob. 1.1YTECh. 23.3 - Prob. 1.2YTECh. 23.3 - Prob. 2.1YTECh. 23.3 - Prob. 2.2YTECh. 23 - Prob. 1SQPCh. 23 - Prob. 2SQPCh. 23 - Prob. 3SQPCh. 23 - Prob. 4SQPCh. 23 - Prob. 5SQPCh. 23 - Prob. 6SQP
Ch. 23 - Prob. 7SQPCh. 23 - Prob. 8SQPCh. 23 - Prob. 9SQPCh. 23 - Prob. 10SQPCh. 23 - Prob. 11SQPCh. 23 - Prob. 1SQCh. 23 - Prob. 2SQCh. 23 - Prob. 3SQCh. 23 - Prob. 4SQCh. 23 - Prob. 5SQCh. 23 - Prob. 6SQCh. 23 - Prob. 7SQCh. 23 - Prob. 8SQCh. 23 - Prob. 9SQCh. 23 - Prob. 10SQCh. 23 - Prob. 11SQCh. 23 - Prob. 12SQCh. 23 - Prob. 13SQCh. 23 - Prob. 14SQCh. 23 - Prob. 15SQCh. 23 - Prob. 16SQCh. 23 - Prob. 17SQCh. 23 - Prob. 18SQCh. 23 - Prob. 19SQCh. 23 - Prob. 20SQ
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Similar questions
- Using a correctly labeled loanable funds graph, show the effect of the contractionary fiscal policy decreasing government spending on real interest rates. Given the change in the real interest rate. What is the impact on each of the following? a. investment b. Economic growth rate. Explain. c. The international value of the dollar. Explain. Now assume instead that the government takes no policy action to fix the problem of the economy that is operating above full employment. In the long run, will the short-run aggregate supply increase, decrease, or remain unchanged? Explain.arrow_forwardSuppose that GDP equals $10 trillion, consumption equals $6.5 trillion, and the government spends $2 trillion and has a budget deficit of $300 billion. Please use the loanable funds model to analyze the effects of a government budget deficit (please attach a copy of your graph) A. Draw the diagram showing the initial equilibrium. B. Determine which curve shifts when the government runs a budget deficit. C. Draw the new curve on your diagram. D. What happens to the equilibrium values of the interest rate and investment?arrow_forwardExplain how, for a country with a high debt ratio, if the financial markets fear that the country will default on its debt this fear may be self-fulfillingarrow_forward
- How does tax cuts encourage savings and investmentarrow_forwardDraw the loanable funds market for 30-year fixed rate mortgages with the equilibrium rate at 5.13% and the equilibrium total amount of mortgages at $12.0 trillion. a> For the sake of simplicity, assume that mortgages are issued and financed through “banks” (I know some of you work in the mortgage, real estate, or finance industry and know the minute details of the mortgage market, but let’s just keep it simple). If people are willing to save more money in “banks,” how will this market be affected? (i.e., which curve(s) will shift, and in which direction?) b> What will happen to the equilibrium quantity of loans after the event in part a? What will happen to the equilibrium interest rate for 30-year fixed rate mortgages after the event in part a?arrow_forwardThe following graph shows the market for loanable funds in Aperto, a large open economy. The government of Aperto has just instituted a tax hike, decreasing the deficit. On the graph, shift either the demand curve or the supply curve to illustrate the change in fiscal policy. (?) Domestic Saving Supply Demand Supply Demand 1 10 20 30 40 50 QUANTITY OF LOANABLE FUNDS The decrease in deficit causes the interest rate in Aperto to As an open economy, this change in interest rate causes the net capital inflow to Aperto to This change in net capital inflow causes Aperto's currency to which in turn causes Aperto's net exports to The change in net exports caused by the tax hike the impact on aggregate demand of the restrictive fiscal policy. REAL INTEREST RATEarrow_forward
- 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.arrow_forwardHow does the government budget deficit impact interest rates, investment, and economic growth? Explain your answer.arrow_forwardOR b. Suppose GDP equals $10 trillion, consumption equals $6 trillion, the government spends $2 trillion and has a budget deficit of $500 billion. Given the above, find the following: public saving, taxes, private saving, national saving, and investment. Show your work!arrow_forward
- Will Increase in government spending financed by borrowing help promote a strong recovery from a severe recession? Why or why not?arrow_forwardUse the analysis for the market for loanable funds diagram to illustrate and explain how the following government policy affect the economy’s saving and investment. 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. (i) which which loanable funds curve would this policy affect? (ii) which way would the loanable funds curve shift? (iii) what would be the the impact on interest rates?arrow_forwardThe following graph shows the demand for loanable funds and the supply of loanable funds in the United States. At the current equilibrium, the government is experiencing a balanced budget. Assume that the U.S. government bails out several troubled banks without increasing taxes, creating 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. D S INTEREST RATE F2 -O- F3 Ö+ F4 C D F5 a F6 N F7 51- F8 5+ F9 Ⓒ F10 -0. F11 F12 Fn Lock Ins Parrow_forward
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