a) Why do you think the market equilibrium in the loanable funds market maximises efficiency? (2...

a) Why do you think the market equilibrium in the loanable funds market maximises efficiency?

b) Suppose that in the next federal budget, the government decides to eliminate all (government) purchases that are financed by borrowing because the politicians worry about a budget deficit. What is wrong with this argument? Briefly discuss using the loanable fund market (no bullet points please). (2.5 marks)

Expert Solution

Rahul Sunny answered 2 years ago

1. Why do you think the market equilibrium in the loanable funds market maximises efficiency? 2....

1. Why do you think the market equilibrium in the loanable funds market maximises efficiency? 2. Suppose that in the next federal budget, the government decides to eliminate all (government) purchases that are financed by borrowing because the politicians worry about a budget deficit. What is wrong with this argument? Briefly discuss using the loanable fund market (no bullet points please)

There are two aspects of efficiency that the equilibrium of market for loanable funds exhibits.

There are two aspects of efficiency that the equilibrium of market for loanable funds exhibits. Select the TWO statements that characterize these two aspects of efficiency Savers who lend money are willing to accept a higher minimum interest rate than potential savers who do not lend money. Investment projects that are financed by savers have larger rates of return than projects that do not receive financing Savers who lend money are willing to accept a lower minimum interest rate than potential savers who do...

Initially, in a borrowing and lending market, or a loanable funds market, there is an equilibrium.

Initially, in a borrowing and lending market, or a loanable funds market, there is an equilibrium. Suppose entrepreneurs' aggregate expectations are that the economy is going to be good next year (i.e. opportunities for investment). What is likely to happen to the equilibrium interest rate under the following scenarios: 1. There is no change in the loan supply curve; 2. Potential lenders disagree with entrepreneurs, lenders view the future economic outlook as negative/riskier. Answer both cases using the theory of loanable fund...

Initially, in a borrowing and lending market, or a loanable funds market, there is an equilibrium....

Initially, in a borrowing and lending market, or a loanable funds market, there is an equilibrium. Suppose entrepreneurs' aggregate expectations are that the economy is going to be good next year (i.e. opportunities for investment). What is likely to happen to the equilibrium interest rate under the following scenarios: 1. There is no change in the loan supply curve; 2. Potential lenders disagree with entrepreneurs, lenders view the future economic outlook as negative/riskier. Answer both cases using the theory of...

Explain why the loanable funds market will return to an equilibrium interest rate when the actual...

Explain why the loanable funds market will return to an equilibrium interest rate when the actual interest rate is below the equilibrium interest rate.

1. Please elaborate on why the loanable funds market will go back to an equilibrium interest...

1. Please elaborate on why the loanable funds market will go back to an equilibrium interest rate when the actual interest rate is below the equilibrium interest rate. 2. Would frictional unemployment ever benefit or be at least good for the economy? Explain why it would or would not be. 3. In April of 2020, the federal government started to provide around $600 per week in extra unemployment insurance payments to people. Show graphically and explain how this impacts the...

In an imaginary closed economy, the market for loanable funds is in equilibrium in which the...

In an imaginary closed economy, the market for loanable funds is in equilibrium in which the government is running a balanced budget. In equilibrium, GDP, consumption expenditure and government expenditure are $4,000 million, $2,500 million and $1,000 million, respectively. a. Calculate private saving, public saving, taxes and investment. b. In order to finance for additional expenditures in the future, suppose the government is running a budget deficit in which it raises fund through selling government bonds in the open market....

Assume that the loanable funds market for the United States is currently in equilibrium. a) Draw...

Assume that the loanable funds market for the United States is currently in equilibrium. a) Draw a correctly labeled graph of the loanable funds market for the United States, and label the equilibrium interest rate as r* and the quantity of funds as QF*. b) Congress has decided to dramatically cut government spending over the next two years. i) What will be the impact of the policy action on the government's budget? ii) On your graph in part (a), show...

Use the loanable funds market, explain what happens to the equilibrium interest rate and equilibrium quantity...

Use the loanable funds market, explain what happens to the equilibrium interest rate and equilibrium quantity of loanable funds when: a, Households are optimistic about future economic condition and want to save less.

What is the impact on the loanable funds market if the quantity of loanable funds supplied...

What is the impact on the loanable funds market if the quantity of loanable funds supplied is less than the quantity demanded?

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