Question

1. For each of the following separate scenarios, determine how the supply/demand for loanable funds in the US shifts.

1. The economy is growing and household income increases.

2. Government delays the retirement age.

3. Online shopping makes it easier for customers to consume.

4. Companies are more pessimistic during recessions.

Answer 1

a) Increase in the household income increases both consumption and savings. Increase in the savings depend on the marginal propensity to save. Thus supply of loanable funds curve shifts rightwards increasing the supply of loanable funds in the economy.

b) If government delays the retirement age then government spending will fall. As government pays pensions to retire government employees thus government spending reduces. This decrease the demand for loanable funds.

C) Availability of consumption of goods reduces the saving because people can easily order online and thus spend greater proportion of their income on consumption rather than on saving. Thus supply of loanable funds will decrease.

d) Companies borrow funds to expand their production. In the recession companies are pessimistic regarding the demand side of economy. So they invest less and thus borrow less. So demand for loanable funds will decrease.