Equilibrium in the loanable funds and goods markets: Suppose that the economy begins in equilibrium in...

Equilibrium in the loanable funds and goods markets: Suppose that the economy begins in equilibrium in the loanable funds and goods market. Then, the government decides to reduce its purchases without changing taxes. According to the Classical model:

a) How do the supply and demand for loanable funds in the loanable funds market shift? Draw a diagram to show what happens to interest rates and investment in the new equilibrium.

b) How do the supply and demand for goods in the goods market shift? Draw a diagram to show what happens to the interest rate and output in equilibrium.

c) In the new equilibrium, what has happened to government purchases G? To output Y? To taxes T? To consumption C? To investment I?

Expert Solution

Rahul Sunny answered 2 years ago

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