Final
1. Define any key terms that you feel are important in answering the following question as they are defined in the textbook and explain, in your own words what those definitions mean, and then thoroughly analyze each of the following changes in the market for loanable funds to answer the these questions Use the diagrams below, resizing them as necessary, to illustrate your analysis in explaining what happens to private savings, private investment spending, and the rate of interest if the following events occur. Assume the economy is closed (no transactions are made with foreign countries). My Definitions:
Deficit – The deficit is the money that the government owes but can’t pay with the revenue from taxes.
a. The government reduces the size of its deficit to zero If the government reduces the deficit to zero, the demand for loanable funds will also decrease which is represented by D1 and D2. The reduction in the deficit is represented by Q1 and Q3 which is equal to the decrease in the demand for loanable funds. The decrease in the deficit decreases the interest rates which in turn increases private investment spending from Q3 to Q2 and decreases private savings from Q1 to Q2. b. At any given interest rate, consumers decide to save more. Assume the budget balance is zero If consumers decide to start saving more the supply of loanable funds supply will increase as shown below. The increase in supply lowers the interest rates which in turn increase private investment spending as shown by Q1to Q2. c. At any given interest rate, businesses become very optimistic about the future profitability of investment spending. Assume the budget balance is zero. Higher investment spending will increase the demand for loanable funds as shown in the figure below. The increase in demand also raises the interest rates which in