Assume that the loanable funds market in Country X is currently in equilibrium.
- Draw a correctly labeled graph of the loanable funds market for Country X, and label the equilibrium interest rate as r* and the quantity of funds as QF*.
- Assume that the government of Country X, which had a balanced budget, now increases its spending while holding taxes constant. Assume that the government funds the increase in spending with increased borrowing.
- What will be the impact of this policy action on the government’s budget balance?
- On your graph in part (a), show the impact of this policy action on the interest rate and quantity of funds.
- Given your answer in part (b) (ii), how will private-sector interest-sensitive expenditures be affected?
- Given your answer in part (c), what will be the impact on the long-run growth rate of the economy? Explain.
- Determine the fiscal policy consistent with counteracting recessionary and inflationary gaps
- Identify how the Federal Reserve uses monetary policy as a means to achieve macroeconomic goals
- Analyze various monetary policies used by the Fed and their impact on the money supply.
- iLearn: 5.4 Government Deficits and Debt
- AP Classroom: Government Deficits and Debt