Problem
To explore crowding-out, let's set up a simple loanable funds market in initial equilibrium.
a. Draw a graph showing initial equilibrium in the loanable funds market at $800 million and an interest rate of 4%. Label your initial supply and demand curves as S1 and D1.
b. Now assume that the government increases spending by $100 million that is entirely deficit-financed. Show the new equilibrium in the loanable funds market.
c. Write the new equilibrium interest rate and quantity of loanable funds in the blanks below:
New interest rate: _______
New quantity of loanable funds: _______
d. If we assume there was no government debt prior to the fiscal stimulus, determine the new quantities for the categories below:
Savings: ______
Investment: _______
Government spending: _______
e. How much did private consumption change as a result of the change in savings?
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.