1. Assume that the loanable funds market in country X is currently in equilibrim represented by the graph of the loanable funds where interest rate is r1 and Quantity of loanable funds as Q1. Assume that, government of Country X, which had a balanced budged now increased their spending while the taxes are constant. GDP = 1,000 million BDT G = 100 million BDT C = 850 million BDT X = 100 million BDT T = 50 million BDT M = 125 million BDT A) What is the level of investment spending and private savings? B) What are amounts of budget balance (deficit/surplus) and net capital inflow? [Hint: net capital inflow equals the value of imports (M) minus the value of exports (X)] Assume that the government funds the increase in spending through increased borrowing C) What will be the impact of the policy action on the interest rate and quantity of loanable funds? Draw correctly labeled graph
1. Assume that the loanable funds market in country X is currently in equilibrim represented by the
graph of the loanable funds where interest rate is r1 and Quantity of loanable funds as Q1.
Assume that, government of Country X, which had a balanced budged now increased their spending
while the taxes are constant.
GDP = 1,000 million BDT G = 100 million BDT C = 850 million BDT
X = 100 million BDT T = 50 million BDT M = 125 million BDT
A) What is the level of investment spending and private savings?
B) What are amounts of budget balance (deficit/surplus) and net capital inflow? [Hint: net capital
inflow equals the value of imports (M) minus the value of exports (X)]
Assume that the government funds the increase in spending through increased borrowing
C) What will be the impact of the policy action on the interest rate and quantity of loanable funds?
Draw correctly labeled graph
D) Given your answer, how will the private sector be affected? Is there any “crowding out”?
Explain. (Take help of graph if you want)
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