Question

6. Suppose there is a surplus in the market for loanable funds. Is the interest rate above or below its equilibrium level? How do saving and investment at this interest rate be compared? Which one is greater?

7. If at some interest rate desired investment is $400 billion, desired private saving is $600 billion, and the budget deficit is $300 billion, is there a surplus or a shortage in the market for loanable funds? What does this imply would happen to interest rates?

8. In a closed economy, GDP is $1000, government purchases are $200, and consumption is $700. If the government has a budget surplus of $25, what are investment, taxes, private saving, public saving and national saving?

Answer 1

6. When there is a surplus of loanable funds, this means the quantity supplied for loanable funds is higher than the quantity demanded loanable funds. This happens because the interest rate is above the equilibrium level. When the interest rate is above the equilibrium level, the supply of loanable funds become higher than the equilibrium level of supply but because of the higher interest rate, the demand for loanable funds is less than the equilibrium level. So, there is a surplus of loanable funds.

The saving will be higher than the equilibrium level and the investment will be lower than the equilibrium level. So, In this level, the saving is higher than the investment.