Question

Suppose that a country is in a recession and the government decides to increase spending. It commissions a very large statue for $50 million. To pay for the statue, the government borrows all of the $50 million. As a result, the interest rate increases from 3% to 4%, and the equilibrium quantity of loanable funds increased from 500 million to 530 million.

Required:
Sketch a graph for the loanable funds market to represent this scenario.

Answer 1

See the attached photo for the graph for the loanable funds market

Step-by-step explanation:

Note: See the attached photo for the graph for the loanable funds market to represent this scenario.

In the attached photo, the equilibrium quantity of loanable funds is on the horizontal axis, while the interest rate is on the vertical axis.

The graph shows that there is a positive relationship between the equilibrium quantity of loanable funds and the interest rate. That is, as the interest rate rises, the equilibrium quantity of loanable funds also rises.