Question

Draw a correctly labeled loanable funds graph that shows what happens to real interest rates for each of the following situations: (You will have 3 graphs)
The government borrows money to fund a war.
Private investors become more optimistic about the economy.
The government raises personal income taxes (do not consider the change in consumer saving).
In the text box provided, enter the time and date you sent your graphs to your instructor. Please specify if you e-mailed or faxed the graph. Make sure your name and the assignment number are on your paper and that each graph is clearly marked with an a, b, or c. (30 points)

Answer 1

Answer:

1. a) War increases demand for loanable funds, demand curve shifts RIGHT. (Increase in real interest rate)

b) Private investors are optimistic about the economy (i.e. investment opportunities). Demand for loanable funds increases, demand curve shifts RIGHT. (Increase in real interest rate)

c) Tax increase means a decrease in the supply about loanable funds. Supply curve shifts LEFT. (Increase in real interest rate)

2. would most likely increase the supply of loanable funds. If Americans are saving more, then they are spending less money and investing more of it. Remember--saving does not mean "not using it". It means investing it instead of consuming.

3. The interest rate will fall. There is a surplus of loanable funds and the real interest rate will reflect this surplus by falling.

4. decrease in the demand for loanable funds. When output decreases, the return on investment for new projects decreases and investors are less in need of money to fund their ventures.

5. decrease the supply for loanable funds. If they are consuming more, they are saving less.

6. Increase / Decrease. When interest rates increase, growth is reduced because funding economic ventures is now more costly. Sometimes the fed will increase interest rates when it anticipates inflation to increase in order to mitigate economic growth.

Hope this was helpful!

Explanation: