Question

In Chapter 8, we explore the importance of private and public saving to provide funds for private business investment. Take a look at the current situation that point to a record federal budget deficit of about $340 billion. The loanable funds model in this chapter predicts that a government deficit causes real interest rates to rise. However, right now, real interest rates are at a record low. Based on the loanable funds diagram, what must be true for private investment right now? Are businesses enthusiastic to invest? Please respond by Friday, October 9.

Answer 1

Based on lonable funds theory, private investment will decline massively as the Government has spent massively alongwith structural reforms and backed by US federal reserves expansionary monetary policy which has driven public investment.

Thus due to crowding out effects private investment shall remain subdued and less enthusiastic to lower consumption demand and higher debt and losses incurred during pandemic. The private sector will readily borrow for internal resources and operational expenditure but shall marginally spend on capital expenditure.

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