Answer to Question #228748 in Macroeconomics for cvbnm

Question

When government becomes a lender in the loanable funds market:

• (i) The supply of funds increases, and the interest rate decreases.
• (ii) The supply of funds increases, and the interest rate increases.
• (iii) The supply of funds decreases, and the interest rate decreases.
• (iv) The supply of funds decreases, and the interest rate increases.

(i) and (ii) are correct.

(ii) and (iv) are correct.

only (iii) is correct.

only (i) is correct.

Answer 1

only (i) is correct

In this case, the supply of money will increase as several money gained from government activities including taxes will be available to accommodate for the loans. Since it is government, it may choose to encourage its citizens to engage into the loans, which will make them to reduce interest rates.