Question

Suppose the market for loanable funds is current in equilibrium, with no (zero) capital inflows or capital outflows. a. Using a supply and demand diagram, depict this situation.b. Suppose that there is a change in spending, and consumers start buying more importedgoods than firms are exporting, so that there is now negative net exports. Depict theeffect this will have on the market for loanable funds.

Answer 1

a. The situation can be shown with a normal equilibrium supply and demand graph (as shown in the attached file).

b. There is a shift in demand from left to right due to the crowding out of the deficit budget.

Step-by-step explanation:

If the government is running a deficit budget, there will be an increase in the total demand for loanable funds. This is because the government must borrow money to balance the situation. As a result, the interest rate will increase. However, the private demand will remain the same and investment will be less due to the high interest rate.