Question

Does a change in the real interest rate shift the supply of loanable funds curve? Explain your answer. How does a currency drain affect the money multiplier? What are the two channels through which the world economy can affect U.S. aggregate demand? State what changes in the world economy can increase U.S. aggregate demand.

Answer 1

Yes, a change in real interest rate shifts supply of loanable funds curve. Savings incurs an opportunity cost when they lend to a business. More people are willing to forgo consumption and make a loan when the interest rate is higher.

$\therefore$ The supply curve of loanable funds slopes upward.

A currency drain is an increase in currency held outside the banks. It decreases the amount of money that banks can create from a given increase in the monetary base because currency drains from their reserves and decreases the excess reserves available.

The money multiplier decreases in magnitude when the currency drain increases.

Two channels through which the world economy can affect U.S. aggregate demand could be appreciated in the U.S. exchange rate and a rise in foreign income.

When the U.S. dollar appreciates, the exports will decreases and imports will increase thereby reducing net exports of U.S. This will aggregate expenditure to go down and will cause a decrease in aggregate demand.

When foreign income rises, there will be an increase in exports and thereby an increase in aggregate demand.