Using a graph representing the market for loanable funds, show and explain what happens to interest rates and investment if the government budget goes from a deficit to a surplus.

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Aleea Washington · Accepted Answer

Final Answer : As shown in the graph below, the economy starts in equilibrium at point E 0  with interest rate r 0  and equilibrium quantity of saving and investment at q 0 . If the government succeeds in obtaining a surplus, there will be more public saving in the economy and so more national saving at each interest rate, and the supply of loanable funds curve will shift from S 0  to S 1 . The new equilibrium will be at E 1 , with a lower interest rate, r 1  and a higher quantity of saving and investment, q 1 . Hence, if the federal government succeeds in having a surplus, interest rates will fall and investment will increase.​Market for Loanable Funds​  0  with interest rate r 0  and equilibrium quantity of saving and investment at q 0 . If the government succeeds in obtaining a surplus, there will be more public saving in the economy and so more national saving at each interest rate, and the supply of loanable funds curve will shift from S 0  to S 1 . The new equilibrium will be at E 1 , with a lower interest rate, r 1  and a higher quantity of saving and investment, q 1 . Hence, if the federal government succeeds in having a surplus, interest rates will fall and investment will increase. ​ Market for Loanable Funds ​   class=answers-bank-image d-block rel=preload >

Using a graph representing the market for loanable funds, show and explain what happens to interest rates and investment if the government budget goes from a deficit to a surplus.

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