Question

Table shows the initial market for loanable funds in Econland. There is no Ricardo-Barro effect. If the government moves from a balanced budget to a surplus of $20 billion, the new equilibrium has a real interest rate of and quantity of loanable funds traded equal to Real interest rate Demand for Loanable Funds Supply of Loanable Funds (5 billions) (5 billions) 3% 160 40 4% 140 60 5% 120 80 100 100 80 120 8% 140 6% 7% A.5 percent; $120 billion O B. 6 percent; $120 billion O C. 6.5 percent; $110 billion O D.5.5 percent; $110 billion Reset Selection

Answer 1

1> A budget surplus implies that there is an increase in government savings. So, this will increase the supply of the loanable fund.

A rightward shift of the loanable fund supply means a lower interest rate. So, the correct option is A.

2> C is correct

The currency drain ratio or currency deposit ratio is the percentage of amount people would like to hold as cash as a percentage of deposit.

Thus, it will limit the total money creation.