Answer to Question #121737 in Macroeconomics for Saad Farooq

Question

Suppose that after the 2008 elections, the new President and Congress act to cut government spending and, by doing so, eliminate the current federal government budget deficit.
a) Does this change in policy shift the demand curve or the supply curve in the market for loanable funds?
b) Use a supply‐and‐demand diagram for loanable funds to show in which direction the relevant curve shifts.
c) Does the interest rate rise or fall as a result of this change in policy?
d) What happens to private investment as a result of this change in policy?
e) What effect would this policy have on the productivity of US workers?

Answer 1

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