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Using a supply and demand graph as well as written explanations, explain what would happen to...

Using a supply and demand

graph

as well as written explanations, explain

what would happen to the demand, supply, and the equilibrium Real Risk-Free Interest

rate (RRFR) in the domestic real loanable funds (credit) market for each of the following

scenarios:

a. USA: The federal government budget deficit is expected to continue to decrease

during the 2019 fiscal year.

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Answer #1

Lower budget deficit decreases government borrowing (for deficit financing), which decreases the demand for loanable funds. The demand curve shifts left, decreasing both interest rate and quantity of loanable funds.

In following graph, D0 and S0 are initial demand and supply curves for loanable funds, intersecting at point A with initial interest rate r0 and quantity of loanable funds Q0. As demand falls, D0 shifts left to D1, intersecting S0 at point B with lower interest rate r1 and lower quantity of loanable funds Q1.

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