Principles of Economics, 7th Edition (MindTap Course List)
7th Edition
ISBN: 9781285165875
Author: N. Gregory Mankiw
Publisher: Cengage Learning
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Question
Chapter 26, Problem 8PA
Subpart (a):
To determine
The impact of increased borrowings by the government.
Subpart (b):
To determine
The impact of increased borrowings by the government.
Subpart (c):
To determine
The impact of increased borrowings by the government.
Subpart (d):
To determine
The impact of increased borrowings by the government.
Subpart (e):
To determine
The impact of increased borrowings by the government.
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Suppose the government borrows $20 billion more next year than this year,a. Use a supply-and-demand diagram to analyze this policy. Does the interest rate rise or fall?b. What happens to investment? To private saving? To public saving? To national saving? Compare the size of the changes to the $20 billion of extra government borrowing.c. How does the elasticity of supply of loanable funds affect the size of these changes?d. How does the elasticity of demand for loanable funds affect the size of these changes?e. 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 it increase or decrease the effects you discussed in parts (a) and (b)?
Suppose the government borrows $50 billion more next year
than this year.
a. Use a supply-and-demand diagram to analyze this policy.
Does the interest rate rise or fall?
b. What happens to investment? To private saving? To public
saving? To national saving? Compare the size of the
changes to the $50 billion of extra government borrowing,
C, see the attached picture.
In the graph you've just made, what is the level of private saving when the government has a $1 trillion budget deficit? A. $2.5 trillion B. $2.0 trillion C. $1.5 trillion
Thanks!
Screenshot attached
Chapter 26 Solutions
Principles of Economics, 7th Edition (MindTap Course List)
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Similar questions
- Suppose the government has a budget surplus of $50 billion more next year than this year. a) Use a supply-and-demand diagram to analyze this policy. Does the interest rate rise or fall? b) What happens to investment, private saving, public saving, and national saving? Hint: Use diagram or equation to illustrate. c) How does the elasticity of supply of loanable funds affect the size of these changes? Hint: Use a diagram to illustrate. d) How does the elasticity of demand for loanable funds affect the size of these changes? Hint: Use a diagram to illustrate. e) Suppose households believe that smaller government borrowing today implies ower 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 it increase or decrease the affects you discussed in parts (a) and (b)?arrow_forwardThe 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 consumerswill 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 interestdue to the increase in budget deficit, show the impact of the increase in the budgetdeficit on the market for loanable funds. c. How would your conclusion differ if taxpayers fully anticipate future tax increases tooffset the increase in the budget deficit? d. Do you think the Ricardian Equivalence is realistic?arrow_forwardWhat is the likely effect of a substantial increase in government borrowing on the private investment in an economy? A. Private investment will increase due to more government spending. B. Private investment will decrease due to the crowding-out effect. C. Private investment will remain unchanged as government borrowing does not affect private sectors. D. Private investment will first decrease, then increase as government spending stimulates the economy.arrow_forward
- 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 consumerswill be affected if the budget deficit increases to $250 billion per year. Draw a graphto show your conclusion. b. Assuming taxpayers do not anticipate an increase in the future market rate of interestdue to the increase in budget deficit, show the impact of the increase in the budget deficit on the market for loanable funds. c. How would your conclusion differ if taxpayers fully anticipate future tax increases to offset the increase in the budget deficit? d. Do you think the Ricardian Equivalence is realistic?arrow_forwardThe 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.arrow_forwardThe table shows an economy's demand for loanable funds and supply of loanable funds schedules when the government's budget is balanced. The quantity of loanable funds demanded increases by $2.0 trillion at each real interest rate and the quantity of loanable funds supplied increases by $1.0 trillion at each interest rate. If, at the same time the government budget becomes a deficit of $1.0 trillion, what are the real interest rate, the quantity of loanable funds, investment, and saving? >>> Answer to 1 decimal place. Real interest rate (percent per year) Loanable funds Loanable funds demanded supplied (trillions of 2012 dollars per year) 4 7.5 6.5 5 7.0 7.0 6 6.5 7.5 7 6.0 8.0 8 5.5 8.5 9 5.0 9.0 10 4.5 9.5 The real interest rate is 7 percent a year. The quantity of loanable funds is $ trillion, investment is $ trillion, and saving is $ trillion.arrow_forward
- Please answer all the questions below and give a detailed solution. Please double-check before submitting the answer.Fill In The Blank Options Left to Right Top to Bottom:Saving or Investmentdecreases or increasesgreater or lesssurplus or shortageraise or lowerincreasing or decreasingincreasing or decreasingarrow_forwardThe table sets out the data for an economy when the government's budget is balanced. Real Loanable funds Loanable funds interest rate If the government's budget becomes a deficit of $1.0 billion, what are the real demanded supplied (percent per year) interest rate and investment? (billions of 2007 dollars) 4 7.5 4.5 Does crowding out occur? 7.0 5.0 6.5 5.5 ..... If the government's budget becomes a deficit of $1.0 billion, the real interest rate is 7 6.0 6.0 percent a year and the quantity of investment is $ >>> Answer to 1 decimal place. billion. 8 5.5 6.5 9. 5.0 7.0 10 4.5 7.5arrow_forwardWhat is the equilibrium quantity of investment and the equilibrium quantity of private saving? The equilibrium quantity of investment is $ ____ billion, and the equilibrium quantity of private saving is $ ____ billion.arrow_forward
- Attached Question :arrow_forwardShow on the graph how each of the following events changes the equilibrium interest rate by shifting the relevant curve(s). a. The president signs a tax cut into law. 10 9 S 8 7 6 4 3 D 100 200 300 400 500 600 700 800 900 1,000 Loanable funds Interest ratearrow_forwardAdjust the graph to show how a $25.8 billion dollar increase in the government's budget deficit affects the hypothetical loanable funds market below, holding all else equal. Market for Loanable Funds Select the answer that describes the adjustment in the loanable funds market. O The deficit decreases the demand for loanable funds and shifts the demand curve to the left; decreasing the interest rate and crowding out investment spending. O The deficit decreases national savings and shifts the supply curve to the left; increasing the interest rate and crowding out investment spending. O The deficit increases the demand for loanable funds and shifts the demand curve to the right; increasing the interest rate and crowding out investment spending. O The deficit increases national savings and shifts the supply curve to the right; decreasing the interest rate and crowding out investment spending. D Quantity of loanable funds (billions of $) Interest ratearrow_forward
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