The loanable funds market in Country Z is in equilibrium. (a) Draw a correctly labeled graph of the loanable funds market showing the equilibrium real interest rate and the equilibrium quantity of loanable funds. (b) Assume household savings in Country Z increases. (i) Will this cause a shortage or a surplus in the loanable funds market at the current equilibrium real interest rate? (ii) On your graph in part (a), show the effect of the increase in household savings on the equilibrium real interest rate. (c) Based on your answer to part (b)(ii), will lenders be better off or worse off?
The loanable funds market in Country Z is in equilibrium. (a) Draw a correctly labeled graph of the loanable funds market showing the equilibrium real interest rate and the equilibrium quantity of loanable funds. (b) Assume household savings in Country Z increases. (i) Will this cause a shortage or a surplus in the loanable funds market at the current equilibrium real interest rate? (ii) On your graph in part (a), show the effect of the increase in household savings on the equilibrium real interest rate. (c) Based on your answer to part (b)(ii), will lenders be better off or worse off?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:17. 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.
The loanable funds market in Country Z is in equilibrium.
(a) Draw a correctly labeled graph of the loanable funds market showing the equilibrium real interest
rate and the equilibrium quantity of loanable funds.
(b) Assume household savings in Country Z increases.
(i) Will this cause a shortage or a surplus in the loanable funds market at the current equilibrium real
interest rate?
(ii) On your graph in part (a), show the effect of the increase in household savings on the equilibrium
real interest rate.
(c) Based on your answer to part (b)(ii), will lenders be better off or worse off?
(d) Based on your answer to part (b)(ii), what will happen to investment spending in Country Z?
Explain.
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