Question

At the interest rate of 5%, the people of the country of Rupertopia are willing to lend $10,000 to local business, while local businesses are willing to borrow $20,000. When the interest rate rises to 10%, the quantity of loans supplied increases to $20,000, while the quantity of loans demanded drops to $10,000. Because the people of Rupertopia are suspicious of outsiders, all financial transactions happen between locals. Assume both supply and demand curves for loanable funds are linear.

Suppose the town council of Rupertopia, instead of running their usual balanced budget, decides to borrow $5,000 from the townspeople to build a new park. Assume the supply of loanable funds stays constant. Given this information and holding everything else constant, which of the following statements is true:

I. The equilibrium level of private investment spending in Rupertopia will decrease

II. The equilibrium level of savings in Rupertopia will increase

III. The equilibrium interest rate will increase after the town council implements the decision.

Select one:

a. Only II. and III. are true

b. Only I. is true

c. Only I. and III are true

d.  I. II. and III. are all true

Answer 1

2 of fund OR1 an uartity of us o given by ritevsectior of Suppl y Cuv ve S and demand foY 10a nale An Afe demand for pound byoun Council -e demand Curve becomes, wheye GTde ficit of He ovenment Such leat new equilibv i

increased ord ee level ef Savingづ ,as also prCvealed At oR intevest vake , tee leve o investment ts oa So te eve