Question

This week you have learned about the market for loanable funds. In Canada, how has the Coronavirus pandemic affected the market for loanable funds?

• Explain why you think that the pandemic changes one variable in the model.
• Describe the impact on the market equilibrium, including the impact on all other relevant variables.
• Address only *one* shift in the market.
• Think about the variables that will cause a shift (either in demand or supply):
  • Government spending (G)
  • Taxes and/or transfers (T/Tr)
  • Consumption/private saving (C/Sp)
  • Firms’ investment spending (I)

Answer 1

The coronavirus pandemic started as a supply side shock that morphed into ademand side shock. High vulnerability and exacting lockdown measures are progressively burdening the economy, prompting an ascent in private savings in the short run. The fall in aggregate demand is remunerated by higher government spending, as government declared substantial fiscal policy measures. While changes in public savings can be viewed as an identical representation of private savings in the short run, the impact of the COVID-19 episode on aggregate savings is somewahat ambiguous.

But pandemic has certainly reduced the demand for loanable funds i.e investment spending by firms because of low levels of economic activity and trade restrictions. Expected profitability of projects is reduced discouraging investment spending till conditions are normalised.

Therefore, assuming supply of loanable funds remains unchanged and demand for loanable funds falls, the equilibrium interest rate will falls