Suppose that the loanable fund market is in equilibrium at real interest rate r1. The government then
Question:
a. Identify the new equilibrium real interest rate and quantity of loanable funds.
b. How would your answer change if the increase in the budget deficit was accompanied by a significant increase in imports to the United States?
c. During the early 1980s, large government budget deficits were accompanied by large trade deficits. Use your analysis in parts a. and b. to explain why real interest rates did not rise significantly even with a major increase in government borrowing.
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Related Book For
Macroeconomics
ISBN: 9780132109994
1st Edition
Authors: Glenn Hubbard, Anthony Patrick O'Brien, Matthew P Rafferty
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