$13.$ Problems and Applications Q$12$

Suppose the government borrows $$20$ billion more next year than this year.

The following graph shows the market for loanable funds before the additional borrowing for next year.

Use the orange line $($square symbol$)$ to graph the new supply of loanable funds as a result of this government policy to borrow $$20$ billion more next year than this year.

New Supply

$0$

$10$

$20$

$30$

$40$

$50$

$60$

$70$

$80$

$90$

$100$

$10$

$9$

$8$

$7$

$6$

$5$

$4$

$3$

$2$

$1$

$0$

Interest Rate $($Percent$)$

Loanable Funds $($Billions of dollars$)$

Demand

Supply

As a result of this policy, the equilibrium interest rate $.$

Indicate whether each of the following economy components rises or falls as a result of this policy change. Then determine if the magnitude of this change is less than, more than, or equal to the $$20$ billion of extra government borrowing.

Component

Change

Magnitude of Change

Investment

Private saving

Public saving

National saving

A more elastic supply of loanable funds would result in the interest rate rising by and, thus, national saving falling by $.$

A more elastic demand for loanable funds would result in the interest rate rising by and, thus, national saving falling by $.$

Suppose households believe that greater government borrowing today implies higher taxes to pay off the government debt in the future.

This belief causes people to save today, which private saving and the supply of loanable funds. This will the effect of the reduction in public saving on the market for loanable funds.