Question

International economics Loanable funds markets 1. International BoP example. The diagram is for the loanable funds market in U.S. Assume that the world loanable funds rate is 3%. Assume the government budget is balanced. Real Int. Rate SLF domestic sources SLF from world DLF 70 90 100 Q of Loanable Funds In billions a. If the U.S. enacts a law that allows no international transactions, what would be: Real interest rate: Quantity of private savings: Quantity of funds desired for private investment: Remember: I+G-T=S-CA Currently, what is 1? G-T? CA?

Answer 1

Answer 1: The equilibrium occurs at the point where the demand curve of loanable funds intersects the supply curve of loanable funds.

a. Real Interest Rate = 5 per cent

Quantity of Private savings = 90 billions

Quantity of funds desired for private investment : 90 billions

b. I = 90 billions

G - T = 0 as budget is balanced.

S = 90 billions

CA = 0 .

c. If world real interest rate = 3 per cent

Real Interest rate in US = 3 per cent'

Quantity of private savings in US = 100 billions

Quantity of funds for investment : 70 billions

Since, demand for loanable funds is higher than its supply, thus, US will borrow funds from the rest of the world.

Funds = 100 - 70 billions = 30 billions

d. I = 70 billions

G - T =30 billions

S = 100 billions

CA = 0