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.
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.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text: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.
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