Question

Part 1: Draw a loanable funds graph in initial equilibrium (show demand and supply intersecting then trace out an equilibrium interest rate and quantity of loanable funds). Clearly label all the parts of the graph. We’ll assume that the demand for loanable funds comes from investment demand and from government budget deficits, and that the supply of funds come from private and foreign savings. (Grade criteria—correct labeling)

Part 2: Suppose that due to the expectation of a slowdown in the economy from COVID - 19, investment spending decreases, private savings remains constant and public savings remains constant. Use the investment-savings identity to predict what will happen to net exports. Show your work and provide a plausible economic explanation (not math explanation) for your answer. (Grade criteria—use of the I = S identity and use of economics in the explanation).

Part 3: Demonstrate on your original graph (i.e. shift either the demand for loanable funds, the supply of loanable funds, or both) what happens to the real interest rate and the quantity of loanable funds when investment spending decreases. Clearly indicate the direction of the shifts and label the final equilibrium interest rate and quantity of loanable funds. Use the concept of scarcity to explain why the interest rates changes as it does. (Grade criteria—correct shift, labeling, economic explanation)

Part 4: Once again, draw a loanable funds graph in initial equilibrium (show demand and supply intersecting then trace out an equilibrium interest rate and quantity of loanable funds). Clearly label the parts of the graph. On this graph demonstrate what happens to the interest rate if investment spending falls and government spending increases to offset the fall in investment spending. Are you certain of your answer? Why or why not?

Part 5: In the real world, it is rare that a single variable will change while all the others are held constant. For each element of the investment-savings identify (I, Sp, Sg, Srow), predict the likely short-run impact of social distancing then use economic concepts to explain. It might help to write out the longer form for Sp, Sg, and Srow. Your answers will take the form of the example below, where you have filled in the blanks. • Investment spending will _____________(increase or decrease) because __________(explanation)

Answer 1