Loanable Funds Assignment

Part 1

Show the changes for each scenario on a properly drawn and labeled loanable funds market graph. They describe what happens to real interest rates and the quantity of loanable funds.

Scenario #1. The government is preparing to run a deficit in order to pay for a war

Scenario #2. Due to worries about the future Amercians significantly increase their savings

Scenario #3. Japanese foreign investment in the US declines

Scenario #4. America is experiencing a high rate of inflation. To fight it, the government has increased taxes and cut spending.

Part 2:

1. Assume that the economy of Canada is currently at equilibrium. To cover increased healthcare costs, the government increases spending.
2. How will the increase in government expenditure affect each of the following in the short run?

(i) Aggregate demand

(ii) short-run aggregate supply

3.Using a correctly labeled graph of aggregate demand and aggregate supply, show the effect of the increase in government expenditure on real output and the price level.

4.Assume that the government funded this increase in expenditure by borrowing from the public. Using a correctly labeled graph of the loanable-funds market, show the effect of the increase in government borrowing on the real interest rate