Suppose the president of a country uses $250 million to build a highway. The expenditure is entirely financed by borrowing. The government did not borrow any money before building the highway.

Before the government borrowing, the equilibrium amount of savings = $600 million.

After the government borrowing, the equilibrium amount of savings = $700 million.

Use the given information to answer questions

1. How would this expenditure affect the loanable funds market?

2. How much is the amount of firms’ investments before the government borrowing?

Answer: The amount of firms’ investments = $_____________ million.

3. How much is the amount of firms’ investments after the government borrowing?

Answer: The amount of firms’ investments = $_____________ million.

4. Does equilibrium interest rate increase or decrease after the government borrowing?

5. Assume complete crowding out, how much is the decrease in household consumptions after the government borrowing?

Answer: The decrease in household consumptions = $_____________ million.

 

Answer rating: 100% (QA)

Answer1 A loanable fund market is a market for collecting mo from savers and allocate it to the borr... View the full answer