Question

The economies of China and India experienced very rapid growth. This increases their citizens’ income and wealth. In turn, these citizens increase their savings in their country and also in the United States.

@ When foreign savings enter the US loanable funds market, which curves if affected — supply or demand? How is the curve affected?

@ Draw the graph of the US loanable funds market both before and after the increase in foreign savings?

@ How does the change in foreign savings affect both investment and future output in the US?

BE SPECIFIC.

Answer 1

1)

When foreign saving enters the US market, it suggests that supply of loanable fund will witness rise. supply curve will shift to right.

2)

Following is diagram:

In above diagram, after entry of foreign saving, supply of loanable fund has increased which has led to the righward shift in loanable supply curve. Thus, interest rate also has decreased.

3)

Entry of foreign saving increases the loanable supply and that pulls down interest rate. Fall in interest rate activates the investment activities which eventually lead to rise in output of country. Thus, investment and output would rise in USA after entry of foreign savings.