Question

Suppose that there is an increase in the long-run supply of capital. Describe the graphical changes that take place in the loanable funds market. What needed to happen for the goods/services market to clear?

Answer 1

In the long run, an increase in capital leads to an increase in productivity in the economy, leading to a rise in the gross domestic product. The loanable funds in the economy become affected through a graphical representation. Loanable funds refer to the amount nationals are willing to lend or become lend to them.

Explanation:

In the long run, an increase in capital leads to an increase in productivity in the economy, leading to a rise in the gross domestic product. The loanable funds in the economy become affected through a graphical representation. Loanable funds refer to the amount nationals are willing to lend or become lend to them. The banking institutions act as intermediaries between depositors and lenders since their main objective is to earn interest. One of the factors that lead to graphical changes in the loanable funds refers to changes in the expected return on investment. If the consumers perceive that tax rates may be increased, the profits to receive become low, which leads to a shift in the quantity of loanable funds available. Another aspect that affects the graph refers to the consumer's income that affects their savings.

For the market to become apparent, the government needs to ensure the stability of income for the nationals of the economy. A lower savings rate will reduce the investment made in the country, which will reduce productivity. The government should implement the fiscal policies that encourage crowding out, (Chen et al., 2017).