Amid the global pandemic, economic activity in many countries in the world decreased substantially causing a significant reduction in tax revenues. Mexico had a projected a budget deficit of $20 billion dollars. Assume that the government of Mexico borrowed $20 billion more from the market for loanable funds. Answer both parts below assuming that Mexico is a closed economy. a) Use a diagram for the market for loanable funds to analyze this policy. Does the interest rate rise or fall? What happens to investment and national saving? Note: make sure you label your diagram properly. b) Suppose households believe that greater government borrowing today implies higher taxes to pay off the government debt in the future. What does this belief do to private saving and the supply of loanable funds today? Does this change the results you discussed in part (a)?

Amid the global pandemic, economic activity in many countries in the world decreased substantially causing a significant reduction in tax revenues. Mexico had a projected a budget deficit of $20 billion dollars. Assume that the government of Mexico borrowed $20 billion more from the market for loanable funds. Answer both parts below assuming that Mexico is a closed economy. a) Use a diagram for the market for loanable funds to analyze this policy. Does the interest rate rise or fall? What happens to investment and national saving? Note: make sure you label your diagram properly. b) Suppose households believe that greater government borrowing today implies higher taxes to pay off the government debt in the future. What does this belief do to private saving and the supply of loanable funds today? Does this change the results you discussed in part (a)?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Q.1 Assume that the equilibrium in the loanable funds market is at an interest rate of 4% and the total quantity of loans is $600 billion. In addition, in this initial situation, the government is borrowing $60 billion per year to fund the budget deficit. (a) How much is private investment in this initial equilibrium? (b) Now the government increases spending by $300 billion per year and finances this spending completely with additional borrowing. i. Draw a graph to show how the additional borrowing would change the market for loanable funds. ii. Assume that the new equilibrium is at $700 billion and assume complete crowding out. Determine the amount that each component of GDP changes (C, I, G and NX), assuming no change in net exports.
Suppose that the graph below represents the market for financial capital in Palau. How does an increase in the budget deficit of Palau affect its equilibrium interest rate? Interest rate (%) Supply Demand Quantity of financial capital (% of GDP) The equilibrium interest rate increases since the supply curve for financial capital shifts to the left. The equilibrium interest rate decreases since the demand curve for financial capital shifts to the left. The equilibrium interest rate increases since the demand curve for financial capital shifts to the right. The equilibrium interest rate decreases since the supply curve for financial capital shifts to the right.
Use the analysis for the market for loanable funds diagrams to examine and explain both in words anddiagrammatically how the following government policy affect the economy’s saving and investment.Policy 1: Suppose the government passed a tax reform giving an investment tax credit to any firmbuilding a new factory or buying a new piece of equipment.
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
If there is a weakening in time preferences among U.S. consumers and foreign entities that channel their wealth to the United States, then we can expect which of the following to increase? Select all that apply. Choose one or more: A. demand for loanable funds B. level of Investment C. supply of loanable funds D. Interest rates
Suppose 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?
Please answer everything in the photos.
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.
Question 28 Figure 26-2 The figure depicts a supply-of-loanable-funds curve and two demand-for-loanable-funds curves. INTEREST RATE LOANABLE FUNDS Supply D₂ Refer to Figure 26-2. Which of the following events would shift the demand curve from D₁ to D2? a. The government goes from running a budget deficit to running a budget surplus. b. Firms become optimistic about the future and, as a result, they plan to increase their purchases of new equipment and construction of new factories. C. A change in the tax laws encourages people to consume less and save more. d. A change in the tax laws encourages people to consume more and save less.
Assume the country’s government increased spending and as a result, the nation ran a deficit. Explain how the increase in government spending will affect real interest rates and show the change on the loanable funds market graph.
1) In the loanable funds market model, assuming everything else is constant, which curve (supply of funds or demand for funds) is affected if there is an increase in national saving? How will equilibrium real interest rate and equilibrium quantity of loans change as a result?
The current market rate of interest is 10 percent. At that rate of interest, businesses borrow $300 billion per year for investment and consumers borrow $50 billion per year to finance purchases. The government is currently borrowing $150 billion per year to cover its budget deficit. a. Derive the market demand for loanable funds, and show how investors and consumers will be affected if the budget deficit increases to $250 billion per year. Draw a graph to show your conclusion. b. Assuming taxpayers do not anticipate an increase in the future market rate of interest due to the increase in budget deficit, show the impact of the increase in the budget deficit on the market for loanable funds.