Question

he table given below shows an economy’s demand for loanable funds and supply of loanable funds schedules when the government’s budget is balanced.

Real Interest rate (% per year)	Loanable fund demanded (Trillian of 2002 $)	Loanable fund supplied (Trillian of 2002 $)
4	8.5	5.5
5	8.0	6.0
6	7.5	6.5
7	7.0	7.0
8	6.5	7.0
9	6.0	8.0
10	5.5	8.5

a. If the government has a budget surplus of $1 trillion, what are the real interest rate, the quantity of investment, and the quantity of private saving? Is there any crowding out in this situation?

b. If the government has a budget deficit of $1 trillion, what are the real interest rate, the quantity of investment, and the quantity of private saving? Is there any crowding out in this situation?

c. If the government has a budget deficit of $1 trillion and the Ricardo-Barro effect occurs, what are the real interest rate and the quantity of investment?

Answer 1