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The government is running a budget balance of zero when it decides to increase education spending...

The government is running a budget balance of zero when it decides to increase education spending by $100 billion and finance the spending by selling bonds.


The $100 billion in government borrowing will increase the ___A___ for loanable funds. The equilibrium interest rate ___B___, and the equilibrium quantity of loanable funds increases.

Fill A and B.

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Answer #1

Ans. The government will be financing its expenditure of $100 billion by selling bonds in the bond market. So,

A) The supply of bonds in the market will increase i.e. the demand for loanable funds in the market will increase.

B) At given supply of loanable funds, there will be shortage of loanable funds in the market leading to an increase in interest rate which will increase the quantity supplied of loanable funds in the market and decreasing quantity demanded of loanble funds, moving the equilibrium to higher equilibrium quantity of loanable funds.

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