Question

Consider public policy on the market for loanable funds and discuss how it affects investment, private saving and public saving. If the households would believe that greater government borrowing today implies higher taxes to pay off the government debt in the future, how would this affect private saving and supply of loanable funds today?

Answer 1

Public policy is the process of transforming political visions into programs and achieve desired socio-economic aims.

If government is borrowing more today then it also means that major funding will go to government as government is a safe avenue to invest. Money availibity for private projects will be less and interest rates will go up. Suplly of loanable funds will go down. Private and public daving will go up and economy will have lesser speed of growth.

When government spending is higher then then it also means that people get more money to spend and also available funds are higher. However, due to crowding out effect interest rates may go up.

When people will know that in future tax rates will go up then people will spend more as they know that it will anyways go. Investments in tax savings funds will increase. Private savings will decrease and public savings will also increase. This will increase supply of loanable funds.