Equilibrium in the loanable funds and goods markets, pt. 2: Again, suppose that the economy begins...

Equilibrium in the loanable funds and goods markets, pt. 2: Again, suppose that the economy begins in equilibrium in the loanable funds and goods market. Now suppose that businesses become more pessimistic about the economy and decide that they want to invest less at every real interest rate r. 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

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...

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....

The interest rate is the price of loanable funds in financial markets, and the equilibrium interest...

The interest rate is the price of loanable funds in financial markets, and the equilibrium interest rate is the price that equates the demand for and supply of loanable funds. Interest rates may move from an existing equilibrium level to a new equilibrium level as the result change in the supply of or demand for loanable funds. For example, if the quantity of loanable funds being demanded increases due to new business opportunities, suppliers of loanable funds will need to...

In the open-economy market for loanable funds, the demand for loanable funds comes from A. domestic...

In the open-economy market for loanable funds, the demand for loanable funds comes from A. domestic investment B. the sum of domestic investment and net capital outflow C. net capital outflow D. national savings

Suppose in a closed economy, the demand for loanable funds can be expressed as r =13...

Suppose in a closed economy, the demand for loanable funds can be expressed as r =13 – 0.05Q and the supply of loanable funds can be expressed as r = 0.015Q, where r is the real interest rate expressed in percentage and Q is the quantity of loanable funds. Also assume the government initially has a balanced budget. (a) What is the equilibrium real interest rate and quantity in the loanable funds market? Show your work. (10 points) (b) Suppose a government’s budget surplus...

Consider an economy that begins in long-run equilibrium. Suppose that there is a wave of pessimism...

Consider an economy that begins in long-run equilibrium. Suppose that there is a wave of pessimism that reduces investment demand at any given real interest rate. That is, suppose that the investment demand curve shifts down and to the left. Use the IS-LM diagram and the aggregate supply - aggregate demand diagram to show how this shift down of the investment demand curve affects the interest rate, income, investment, the price level, consumption, and the supply of real money balances...

Consider the economy where the demand for loanable funds from business and the supply of loanable...

Consider the economy where the demand for loanable funds from business and the supply of loanable funds from households (private savings) are: Demand: Q=1000-100r Supply: Q=200r-500 Q is the quantity of loanable funds and r is the interest rate. In both equations, the interest rate is expressed as a percentage (e.g. if the interest rate is 10%, then r in the equation would be 10) Assume this is a closed economy and that the government has a balanced budget. Holding...

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...

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...

Question