Question

1.For each of the following separate scenarios, determine how the supply/demand for loanable funds in the US shifts. (a)The economy is growing and household income increases.

(b)Government delays the retirement age.

(c)Online shopping makes it easier for customers to consume.

(d)Companies are more pessimistic during recessions.

2.Suppose people now have higher time preferences.

(a)How would this affect the loanable funds market? Show your answers in a graph.

(b)Would GDP increase or decrease?

Answer 1

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

(a) The economy is growing and household income increases.

Demand for loanable funds will shift to the right, as consumption rises

(b) Government delays the retirement age.

Supply of loanable funds will shift to the right, as savings rise

(c) Online shopping makes it easier for customers to consume.

Demand for loanable funds will shift to the right, as consumption rises

(d) Companies are more pessimistic during recessions.

Demand for loanable funds will shift to the left, as investment falls

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2. Suppose people now have higher time preferences.

Higher time preferences imply that people now prefer current consumption, rather than saving it for the future.

(a) How would this affect the loanable funds market? Show your answers in a graph.

Supply of loanable funds will shift to the left.

Real interest rate will rise.

Quantity of loanable funds will fall at equilibrium.

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(b) Would GDP increase or decrease?

Since people are consuming more in the present, consumption in the present period will rise.

Now, AD = C + I + G + NX

If C rises, AD will also rise.

Thus, GDP in the present period will rise.