Question

13. Use the table below to calculate the inflation rate between 2000 and 2003 Year CPI 1999 80 2000 90 2001 107 2002 115 2003 109 2004 120 — 14. The following graphs show the loanable funds market. Give an example scenario, which is represented by a shift from line 3 to line 2. Line 1 Line 4 Vertical Axis Line 3 Line 2 с D Horizontal Axis 15. Suppose the government restricts foreign lenders from lending money in the US loanable funds market. What happens to the equilibrium interest rate in the US? 16. Suppose credit card companies encourages households to spend more. What happens to the equilibrium quantity of loans in the loanable funds market?

Answer 1

13) %change in Inflation is calculated as: [(CPI of current year - CPI of previous year) / CPI of previous year] * 100

Year	CPI	%change in Inflation
1999	80	-
2000	90	12.5%
2001	107	18.9%
2002	115	7.5%
2003	109	-5.2%
2004	120	10.1%

14) Shift from line 3 to line 2 says that demand of loanable funds fell which reduced rate of interest as well as quantity of loanable funds.

15) Government restricts foreign lenders from lending money in US funds market. It will reduce supply of loanable funds in US market which will shift supply curve to its left from S to S1 which will reduce rate of interest from "i" to "i1" and loanable funds fall from "L" to "L1".

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16) Credit card companies encourage households to spend more which is raising the supply of loanable funds in the market which supply curve to its right from S to S1 which result in fall in rate of interest from "i" to "i1" and raise funds from "F0" to "F1".