Question

1. Consider the US loanable funds market. For each of the following separate scenarios, draw a graph to show how the equilibrium interest rate and equilibrium quantity of loanable funds changes.

1. Banks impose more regulations and make it more difficult for firms to borrow.
2. Productivity of machines decreases.
3. Households are less confident about the economy, they expect a recession will come soon.

2. If households expect a recession will come soon, will this increase the natural rate of unemployment? Explain.
3. A recession really occurs, but unemployment rate decreases. Explain how this can be possible.
4. The government makes it more difficult for companies to lay off their workers. However, unemployment rate increases as a result. Explain.

Answer 1