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3) Consider the loanable funds market. Use the following supply and demand equations to answer the questions below. Assume th
c) Suppose that T-G= -600 and the government borrows the entire amount domestically. Find the new demand equation for loanabl
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Answer #1

a. At equilibrium, Qd = Qs such that the interest rates are also equal.

So, 20 - 0.006Q = 0.5 + 0.004Q

20 - 0.5 = 0.004Q + 0.006Q

19.5 = 0.01Q

19.5/0.01 = Q

Q = 1950

r = 20 - 0.006 * 1950

r = 8.3%

b.

interest rate Quantity 1950

c. the new demand curve would be:

r = 20 - 0.006 (Qd + 600)

r = 20 - 0.006Qd - 3.6

r = 16.4 - 0.006Qd

d. new equilibrium, Qd = Qs,

16.4 - 0.006Q = 0.5 + 0.004Q

16.4 - 0.5 = 0.004Q + 0.006Q

15.9 = 0.01Q

Q = 15.9/0.01

Q = 1590

r = 16.4 - 0.006 * 1590

r = 6.86%

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