Show the changes for each scenario on a properly drawn and labeled loanable funds market graph. Then describe what happened to real interest rates and the quantity of loanable funds.
1. The government is preparing to run a deficit in order to pay for a war.
2. Due to worries about the future, Americans significantly increase their savings.
3. A prolonged recession has prompted the government to cut taxes and increase spending.
4. America is experiencing a high rate of inflation. To fight it, the government has increased taxes and cut spending.
5. Explain what crowding out is. In which scenarios could crowding out most likely occur? Explain.
The market for Loanable Fund :
In the market for the loanable funds, the demand, and supply of loanable funds determine the interest rate. At a higher rate of interest, there is less demand for the supply of loanable funds and more supply of loanable funds and vice versa.
Answer and Explanation:
(1)When the government is preparing to run a deficit to pay for the war then the demand for loanable fund increases because the government will borrow...
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fromChapter 25 / Lesson 29