6. 7. The following information describes a loanable funds market. (Values are in billions). Real Interest Quantity of L

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6 7 The Following Information Describes A Loanable Funds Market Values Are In Billions Real Interest Quantity Of L 1 (337.35 KiB) Viewed 41 times

6. 7. The following information describes a loanable funds market. (Values are in billions). Real Interest Quantity of Loanable Rate Funds Supplied Quantity of Loanable Funds Demanded 6% 5% 4% 3% 2% $200 $190 $170 $150 $130 $130 $140 $160 $180 $210 (a) Plot the supply and demand for loanable funds. From the plotted graph, estimate the equilibrium real interest rate and the equilibrium level of saving and investment? (6 marks) (b) What "market forces" will not allow 2% to be the real interest rate? Briefly explain. (3 marks) (c) Suppose government suddenly increases its budget deficit by $40 billion. What is the new equilibrium real interest rate and equilibrium level of saving and investment? Show graphically and explain your result. (6 marks) Explain what will happen to the money supply under each of the following circumstances. Explain your answers. (a) The public decides to increase the amount of currency it holds. (3 marks) (b) Banks decide to hold more excess reserves. (3 marks) 400 real output is 2,000