Question

Our model of the loanable-fund market predicts that, under Reaganomics, national savings shall ___ and interest rate shall ____. increase; increase. increase; decrease. decrease; increase. decrease; decrease

Answer 1

Reaganomics is an economic policy during the period of Ronald Reagan’s administration between 1981 and 1989 following the credit crisis in the prior decade. This policy allowed tax incentive for business, tax reduction to rich people, increased military expenditure and cut on social security programs.

National saving is comprised of private saving and government saving. The Reagan’s policy increased the national savings since the tax cut creates more saving. The loanable fund theory explains that an increase in national saving increase the supply of loanable fund which will lowers the rate of interest.

Answer: increase, decrease.