Question

All three graphs in paint would be greatly appreciated!! Thank you.

1. Draw a correctly labeled loanable funds graph that shows what happens to real interest rates for each of the following situations: (You will have 3 graphs.) (30 a. The government needs money to fund a war. b. Business investors become more optimistic about the economy. c. The government raises personal income taxes.

Answer 1

Answer: 1

When the government needs money to fund war, the supply of loanable funds falls. Due to this fall in supply, the supply curve shills leftwards in the loanable funds market. The new intersection of the demand and supply curves in market of the loanable funds occurs at a higher real interest rate. Therefore, when the government needs money to fund war, the real Interest rate Increases. Real interest rate New Supply Original supply New interest rate- Original interest rate Demand Quantity of loanable funds

b) When private investors become more optimistic about the economy, the increase their demand for loanable funds. Due to this increase in demand, the demand curve shifts rightwards in the loanable funds market. The new intersection of the demand and supply curves in market of the loanable funds occurs at a higher real interest rate. Therefore, when private investors become more optimistic about the economy, the real interest rate increases. Real interest rate Supply New interest rate --- Original interest rate ------- New demand Original demand Quantity of loanable funds

When the government raises personal income taxes, the revenue of government rises, leading to a fall in the budget deficit. This means that the government will reduce its borrowing in the market for loanable funds. Due to this, the supply of loanable funds will increase, as shown by the rightward shift in the supply curve in the following figure. The new intersection of the demand and supply curves in market of the loanable funds occurs at a lower real interest rate. Therefore, when the government raises personal income taxes, the real interest rate decreases. Real interest rate Original supply New Supply Original interest rate New interest rate -- -- Demand Quantity of loanable funds