Question

In: Economics

Suppose the government budget surplus falls. Compared to the last period, this tends to cause the...

  1. Suppose the government budget surplus falls. Compared to the last period, this tends to cause the equilibrium (private sector) long-term real interest rate to ______ and the equilibrium (private sector) quantity of loanable funds exchanged to ______.

    a.

    fall, rise
    b.

    fall, fall
    c.

    rise, fall
    d.

    rise, rise

Solutions

Expert Solution

c. Rise ,fall.

Explanation:

Suppose government budget surplus falls.Compared to the last period this tends to cause the equilibrium (private sector )long term r real interest rate to rise and the equilibrium (private sector) quantity of loanable funds exchanged to fall .Because of the deficit in the government budget, loanable fund's demand rises as a result of which the real interest rate rises as supply quantity of funds of private sector also increases.But due to the high rate of interest, investment declines and thereby equilibrium quantity of loanable funds exchanged falls.

Rahul Sunny answered 2 years ago
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