Question

Using the loanable funds framework, speculate what would happen to equilibrium real interest rates, national savings, investment, and consumption if:

a. Households expect a dramatic increase in productivity in the future (even though current productivity is unchanged) that will boost future incomes and the future marginal products of capital.

b. Uncertainty about future taxes and regulations results in cutting back on firms’ plans to build new production facilities

c. Government spending (financed with taxes so that the budget remains balanced) has increased temporarily.

d. There is a permanent increase in output due to an increase in labor productivity. However, assume that the marginal product of capital both now and the future are unchanged.

Answer 1