Final answer:
Decreasing government borrowing by $10 billion according to the loanable funds model, would likely reduce the equilibrium interest rate making it cheaper for the private sector to borrow and invest, potentially stimulating economic growth.
Step-by-step explanation:
If the government of a country with no international trade has decided to decrease borrowing by $10 billion, using the loanable funds model, it can be expected to lead to several economic impacts, particularly on interest rates and the availability of capital for private investment.When a government borrows less, this effectively reduces the demand for loanable funds. According to the loanable funds model, this decrease in demand would lead to a lower equilibrium interest rate. A lower interest rate can then stimulate private investment because firms will find it less expensive to borrow and finance investment projects. This could lead to an increase in domestic investment in physical and human capital, which is essential for economic growth.
In contrast, when the government is a large borrower, it competes with the private sector for capital, potentially crowding out private investment. High government borrowing can lead to higher interest rates, which could dampen private investment. Moreover, when government debt is high and rising, it can create uncertainty in financial markets and may lead to cuts in government spending or increases in taxes to manage the debt, which can have a contractionary effect on aggregate demand.But in the given scenario of reduced government borrowing, businesses may face less competition for financial resources, possibly lowering the cost of borrowing and encouraging more private sector investment, contributing positively to the economy.