Question

ECO - 252 - Macroeconomics

1. For each of the following events,

Events:

1.The government deficit increases.

2.People decide to save more.

3.Net capital outflow increases at each interest rate.

4.Domestic investment increases at each interest rate.

a. State if the demand for loanable funds or the supply of loanable funds (or neither) will be affected. - Then state if the curve will increase or decrease.

b. Finally indicate the direction of the shift: left or right.

Answer 1

1.The government deficit increases - It means public expenditure is increasing and this increases the interest rate. Hence, crowding out occurs due to discouraged borrowings. A decrease in demand of funds and Demand curve shift to left.

2.People decide to save more.= This leads to increase in the supply of loanable funds as savings is the source of fund supply. Supply of fund shift to right.

3.Net capital outflow increases at each interest rate.= This decreases supply of loanable funds and supply curve shift to left.

4.Domestic investment increases at each interest rate.= This increases demand of funds as people want to borrow and invest more. Demand curve shifts to right.