Questions:
1) Draw a graph of the loanable funds market in equilibrium. Be sure to label correctly.
2) Suppose business optimism increases.
a) Draw what happens in the loanable funds market.
b) What happens to the real interest rate?
c) Explain the dynamics of exactly how the change in business optimism feeds through to the loanable funds market. Be precise.
3) Suppose personal taxes decrease.
a) Draw what happens in the loanable funds market.
b) What happens to the real interest rate?
c) Explain the dynamics of exactly how the change in personal taxes feeds through to the loanable funds market.
4) Suppose the government increases the budget deficit.
a) Draw what happens in the loanable funds market.
b) What happens to the real interest rate?
5) Suppose the government develops a budget surplus.
a) Draw what happens in the loanable funds market.
b) What happens to the real interest rate?
6) Suppose US exports decrease so that NX<0.
a) Draw what happens in the loanable funds market.
b) What will happen to the real interest rate in the US?
c) Explain how this works.
7) Suppose imports decrease so that NX>0
a) Draw what happens in the loanable funds market.
b) What will happen to the real interest rate in the US?
c) Explain how this works.