Answer to Question #153064 in Macroeconomics for AMINAH

Question

1. a) Explain the concept of demand curve for loanable funds.
b) Explain the concept of supply curve for loanable funds.
c) Explain the effect of increasing in government expenditure through selling of bonds on interest rate in classical model.
2. Please use a graph to produce aggregate supply in classical model under the assumption of nominal wage or money wage.
3. Explain the effect of increasing in money supply on price and national income using a classical theory.
4. Explain how interest rate is determined in a classical theory

Answer 1

1. a) The demand curve for loanable funds is downward-sloping because as the interest rate decreases, firms will want to borrow more money. Firms demand loanable funds (investment).

b) The supply of loanable funds represents the behavior of all of the savers in an economy. The higher interest rate that a saver can earn, the more likely they are to save money. As such, the supply of loanable funds shows that the quantity of savings available will increase as the interest rate increases.

c) The increase in government expenditure through selling of bonds will increase the demand for loanable funds, as a result the interest rate will increase in classical model.

2. The classical aggregate supply curve comprises a short-run aggregate supply curve and a vertical long-run aggregate supply curve. The short-run curve visualizes the total planned output of goods and services in the economy at a particular price level.

3. The increase in money supply will increase price level and will not change national income.

4. In the classical model, the interest rate is determined by the amount of savings and investment in an economy. The interest rate adjusts so that the quantity of funds saved is equal to the quantity of money invested.