Answer to Question #259292 in Macroeconomics for AD32

Question

1. Consider an economy in which GDP is $30 billion. Tax revenue is $7 billion, con- sumption is $15 billion,, and the government has a budget surplus of $2 billion. Show your work in each of the following questions. (10% each)

(a) What is the level of government spending?

(b) What is private saving?

(c) What is national saving?

(d) What is the level of investment?

2. Using a supply and demand diagram, explain how each of the following scenarios impacts the market for loanable funds. Show your work, and be specific about what happens to the equilibrium. (10% each)

(a) The government increases its debt, thus crowding out the loanable funds market. (b) The government starts a program that makes it easier for new homeowners to take out a mortgage.

(c) Technological improvements increase the profitability of investments for firms. (d) People’s values change, and they start to save more of their income.

Answer 1

1. (a) Government spending =tax-budget surplus = 7 - 2 = 5.

(b) Private saving =income- consumption- government spending = 30 -15 -5 =10.

(c) National savings =private saving +budget surplus = 10 + 2 =12.

(d) In a closed economy,

Investment= national saving.

Therefore investment =12.

2. (a) Suppose if the government debt increases and thus crowding out the laudable fund market it reduces the demand for loanable funds in the market because when the government debt increases which means that the government demand for an affordable increase when the demand for loabable fund increases the interest rate will also increase that will crowding out the private investment as a result the private the demand for loanable wonderful decline and demand curve will shift to the left at this new equilibrium point both the interest rate as well as the quantity of the loanable fund will decline.

(b) Suppose if the government start a program that make it easier for new home owners to take out a mortgage it will increase the demand for loanable funds because taking loan is more easy and therefore the demand curve will shift to the right at the equilibrium point in both the interested as well as the quantity of loanable funds will increase.

(c) Suppose there is a technological improvements that increases the profitability of the investment for the firm the firm will invest more as a result the demand for your refund will increase as a result the demand curve will shift to the right at this new equilibrium point both the interest rate as well as the quantity of loanable fund will increase

(d) Suppose peoples value changed and they started to save more of their income saving will increase as a result the supply of loanable funds will also increase when the supply of loanable funds increase the supply curve will shift to the right at this new equilibrium point interest rate will fall and quantity of loanable funds will increase