Question

For each of the following events,

-State if the demand for loanable funds or the supply of loanable funds (or neither) will be affected

-Then state if the curve will increase or decrease

-Finally indicate the direction of the shift(left or right)

Events:

A. The government deficit increases.

B. People decide to save more

C. Net capital outflow increases at each interest rate.

D. Domestic investment increases at each interest rate.

Answer 1

A The government deficit increases- It reduces the national savings. So the supply of loanable fund will be decreased. It will shift the supply curve to the left.

B. People decide to save more- It will increase the demand for loan, in the response to this interest rate will be increased. This shifts the demand curve to the right.

C. Net capital outflow increases at each interest rate- There is an inverse relation between net capital outflow and interest rate. So interest rate will be decreased in the response of the increase in outflow of net capital. So the demand for the loan will be increased at a low-interest rate. Demand curve shifts to the right.

D. Domestic investment increases at each interest rate- It will increase the demand for loan. So the demand curve shifts to the right.