Suppose that a government passed a new law that requires firms to comply with strict regulations....

Suppose that a government passed a new law that requires firms to comply with strict regulations. This law discourages investment in the country. At the same time, government surplus increases sustainability because of effective policies. In a single well labeled graph , show the consequences of above information on the market for loanable funds. Be sure to specify changes in the equilibrium interest rate and equilibrium quantity of loanable funds.

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Expert Solution

It is given that the new law discourages investment in the country. This implies that there will be fewer funds demanded and the demand for loanable funds should decrease. At the same time government surplus has increased which means public saving is increased and therefore the supply of loanable funds increases. Demand curve is shifting to the left and the supply curve is a shifting to the right. Therefore the rate of interest is decreased in the loanable funds market however we are not certain about the quantity and the new equilibrium, because it may increase decrease or remain unchanged depending upon the size of the two shifts

Rahul Sunny answered 2 years ago

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