Question

We have seen that Federal Reserve Chairman Ben Bernanke has argued that low interest rates in the United States during the​ mid-2000s were due to a global savings glut rather than to Federal Reserve policy. In an interview with Albert Hunt of Bloomberg​ Television, Alan​ Greenspan, who was Federal Reserve Chairman from August 1987 through January 2006 made a similar argument. Greenspan​ argued, "Behind the low level of​ long-term rates: a global savings glut as​ China, Russia and other emerging market economies earned more money on exports than they could easily​ invest."

​Source: Rich Miller and Josh​ Zumbrun, "Greenspan Takes Issue with Yellen on​ Fed's Role in House​ Bubble," bloomberg.com, March​ 27, 2010.

Use the loanable funds graphs to illustrate​ Barnanke's argument that a global savings glut caused low interest rates in the United States. One graph should illustrate the situation in the United​ States, and the other graph should illustrate the situation in the rest of the world.

​1) Using the line drawing​ tool, show the effect of the savings glut in the rest of the world. Properly label your line.

​2) Using the double arrow​ tool, indicate the amount of loanable funds the U.S. either borrows or lends at the new world real interest rate. Properly label your double arrow line.

Carefully follow the instructions​ above, and only draw the required objects.

United States Rest of the World Quantity of loanable funds Quantity of loanable funds