Question

• What are the effects of budget deficit and budget surplus on the market for loanable funds? How are these effects called? Explain the mechanism.

Answer 1

In economics the doctrine of loanable funds is a theory of market interest rate.According to these approach the interest rate is determined by the demand and supply of loanable funds
The market of loanable funds is a way of representing all of potential borrowers and savers in an economy.Whenever there is a budget deficit the interest rate increases there is more demand for loanable funds but less supply of loanable funds.
Whenever there is a budget surplus the demand for the loanable funds decreases and the supply of loanable funds increases.
The Fisher effect states that an increase in the expected future inflation will increase the nominal interest rates exactly the amount of expected inflation.