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 will change the supply for loanable funds to

r = -1.95 + 0.015Q, what is the equilibrium real interest rate and the quantity of loanable funds now? (10 points)

(c) How much is the amount of private savings? Show your work. (10 points)

(d) What is the amount of the budget surplus? (10 points)

Expert Solution

Rahul Sunny answered 1 year ago

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