Chapter 30, Problem 2FRQ

To determine

The graph of the market for loanable funds shows the effect of a persistent budget deficit and whether the persistent budget deficits can affect private investment.

Explanation of Solution

The graph of the market for loanable funds would show the effect of a persistent budget deficit as follows:

  

The above graph shows that a budget deficit increases the demand for loanable money, raising the real interest rate in the process. Here, lenders will be ready more to lend money at higher interest rates because of recompense for the future decline in the value of the money they will be paid.

Access to the capital market becomes challenging for private investors due to the usage of the budget deficit, particularly during periods of slow economic growth when it is being covered by public debt. Economic progress is at risk from a decline in profitable investment, income, and mass profits. In this approach, a double negative flow develops, with the expansion of the public sector and the growth of state interventionism occurring simultaneously with the spread of the crisis and inflation.

Economics Concept Introduction

Introduction: The loanable funds market provides an explanation of how savers and borrowers interact in an economy, and it is used to comprehend and analyze macroeconomic development.