Question

3) For each of the cases below, draw a well-labeled graph of the loanable funds market and indicate the changes in the market due to the following a) Poor economic outcome leads to unfavorable investment environment b) Federal government decreases the tax rate without changing total deficit c) Federal government decides to increase government spending and hence increases the deficit.

Answer 1

As D F G H caps lock v a) This will be s will lead to lower environment meaning less demand of the funds thurs shifting the demand curve for loaneble funds donen prom Do to Di trence the overell bunds borrowed and therefore the inicestment decreases

0 l) Here the total deficit is not chenging. And the tas rates are decreasing. So the supply of loanelle funds increases. from So to S,. This increasing the overell investment Si S when the total defent increases there is a decrease in the savings rete which decreases the overall supply of loanelle funds, from so to si Therefore decreasing the overell investment