A national newspaper'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 zero, will the nominal interest rate be greater than, less than, or equal to the real interest rate? Explain.
A national newspaper'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 zero, will the nominal interest rate be greater than, less than, or equal to the real interest rate? Explain.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:Include correctly labeled diagrams, if useful or required, in explaining your answers.
A correctly labeled diagram must have all axes and curves clearly labeled and must
show directional changes. If the question prompts you to "Calculate," you must
show how you arrived at your final answer.
A national newspaper'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 zero, will the nominal interest rate be
greater than, less than, or equal to the real interest rate? Explain.
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