Due to recent pandemic in country A, the economic activity in this country has decreased substantially causing a significant reduction in government revenues. The country projects a budget deficit of 35 billion dollars next year. The government of Canada borrows $35 billion more next year than this year from the market for loanable funds. a) Use a supply-and-demand diagram to analyze this policy. Does the interest rate rise or fall? Note: make sure you label your diagram properly. b) What happens to investment? To private saving? To public saving? To national saving? Compare the size of the changes to the $35 billions of extra government borrowing. Hints: explain with diagram and/or formula learned. c) How does the elasticity of supply of loanable funds affect the size of these changes? Hints: demonstrate with diagrams.
Due to recent pandemic in country A, the economic activity in this country has decreased substantially causing a significant reduction in government revenues. The country projects a budget deficit of 35 billion dollars next year. The government of Canada borrows $35 billion more next year than this year from the market for loanable funds.
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a) Use a supply-and-
demand diagram to analyze this policy. Does the interest rate rise or fall? Note: make sure you label your diagram properly. -
b) What happens to investment? To private saving? To
public saving ? To national saving? Compare the size of the changes to the $35 billions of extra government borrowing. Hints: explain with diagram and/or formula learned. -
c) How does the elasticity of supply of loanable funds affect the size of these changes? Hints: demonstrate with diagrams.
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