Question

Please decide whether each of the follow scenarios related to the loanable funds market will result in a shift in supply or a shift in demand. China decides to reduce its capital investment in the United States as it expects low returns due to a weak U.S. economy. Calopolis, a college town in Northern California, has for many years banned the presence of fast food restaurants in city limits. As of 2012, however, the city will allow several fast food companies to open franchised locations. Due to an increase in revenues after a tax hike, the United States is able to eliminate the deficit and begins to maintain a balanced budget for the first time in several decades. As a result of a stock market boom, individuals begin to feel richer and spend more while also saving less.

Answer 1

1. When China decides to reduce its capital investment in the US, US's capital inflows, which are a source of loanable funds in the US, take a hit. This leads to a reduction in supply of loanable funds in the US, shifting the supply curve leftward.

2. When a ban is imposed on fast food restaurants, the amount loanable funds demanded by the fast food industry reduces, leading to a leftward shift m the demand curve of loanable funds.

3. When fast food restaurants are allowed to open franchised locations, the amount loanable funds demanded by the fast food industry increases, leading to a rightward shift m the demand curve of loanable funds.

4. When the US government reduces its deficit, it reduces its borrowings. A reduction in borrowing by the US government leads to a reduction in the demand for loanable funds, and therefore shifts the demand curve fur loanable funds leftward.

5. When individual start to spend more owing to the wealth effect, savings reduce, leading to a fall in the supply of loanable funds. Due to this, there occurs a leftward shift in the supply calve for loanable funds.