Question

1. Consider the US loanable funds market. For each of the following separate scenarios, draw a graph to show how the equilibrium interest rate and equilibrium quantity of loanable funds changes.

1. Banks impose more regulations and make it more difficult for firms to borrow.
2. Productivity of machines decreases.
3. Households are less confident about the economy, they expect a recession will come soon.

2. If households expect a recession will come soon, will this increase the natural rate of unemployment? Explain.
3. A recession really occurs, but unemployment rate decreases. Explain how this can be possible.
4. The government makes it more difficult for companies to lay off their workers. However, unemployment rate increases as a result. Explain.

Answer 1

Qù As t Int mill E the leading to b Y Р u As (El equi Loanable becomes difficult for the firms to borrow, demand for loanable funds ratei decrease and thus ist curre will shift leftwards to fall equilibrium interest Tarings at rate and equilibrium Quantity of loanable Irrestment funds. As productivity of machines decreases, the demand for loanable funds mill decrease and this will reduce librium Interest rate and Quantity of funds. Yin dir As the confidence of households decreases the consumption decreases savings increases and supply loanable funds shifts II to Leading to interest rate and - fall the amount loanable of increase funds, (b) during time of Recession, if Government mill follows expansionary rate . demand reduce unemployment because laber demand decreases which and rate. D and curne sls rightward in the thies increase policy , then companies will have demand unemployment This ☺ los labor increases