Question

Create loanable funds market graphs for each the following (be sure to note what is happening on the x and y axis). You need to create a separate graphical answer,

1. If households start to fear that banks are unsafe.
2. If the government spends more and runs greater deficits.
3. Television newscasters convince most people that the end of the world will occur in 2018.
4. Breakthrough advances in pharmaceuticals increase life expectancy to 100 years.

Answer 1

A) If households fear that banks are unsafe, they will start withdrawing their money and savings with the banks. This will reduce supply of loanable funds in the market. Supply curve shifts left, leading to an increase in market interest rate and fall in quantity of loans in market

B) If government runs more deficits, demand for loanable funds will increase, as government demands more loans and money to funds its deficit. Demand curve shifts to the right, leading to an increase in both interest rate and quantity of loans in market

C) When people are convinced that world will end in 2018, they start spending more and save less. This will reduce their savings and thus supply of loanable funds will shift to left, leading to an increase in interest rate and fall in loans given in market

D) When life expectancy increases to 100, people start saving more money in order to use them in future old age.

This will increase supply of loanable funds in the market, shifting supply curve to right. This leads to fall in interest rate and Increase in quantity of loans given out

Graphs are below: