Answer to Question #153437 in Macroeconomics for kelly

Question

Assume that Pipeline Asia Group working with Saudi Pipeline Group aims to create giant natural gas transmission business. Suppose the deal will create a 91,000-kilometer natural gas pipeline system. Show on a graph the effect of Pipeline Asia Group going to the loanable funds market to finance the deal with Saudi Pipeline Group. Explain the effect on the real interest rate, private saving, and investment. 

Answer 1

Real intrest rate is nominal interest rates minus inflation. Thus in this circumstance the getting finance from the loanable funds lead to a rise in the real interest rates leading to an expansionary monetary policy.

Private savings

increased interest rates create the incentive to save rather than to spend. A rise in interest rates make it more attractive to save in a deposit account because of the interest.

For investment

Increased intrest rates reduce borrowings because it makes borrowing more expensive.Therefore this discourages people from borrowing and investing.

Overally in the economy is the decrease in the aggregate demand from AD1 to AD 2as shown in the diagram below. The GDP also reduces from Y1 to Y2