Question

a.Assume that the United States begins deficit spending to fund new social welfare programs.

b.Using a correctly labeled loanable funds graph, show and explain the impact of the new spending on real interest rates in the United States.

i.Explain the impact of the change in interest rates you identified in part (A) on each of the following:

ii.Capital investment

iii.Long-term economic growth

The international value of the U.S. dollar

2.

a.Assume a visitor from another nation decides to open a checking account at J & R National Bank. The visitor deposits $20,000 that is new money to the Macro Islands economy. The central bank has set a required reserve ratio of 10%.

i.What is the change in the total amount that J & R National Bank can loan out? Explain.

ii.Calculate the total amount that the bank can create? (Calculate means show your work.)

B. Now assume that the Macro Islands government decides to increase spending to fund new projects that will bring in more visitors. Explain what will happen to the demand for loanable funds and real interest rates as a result.

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