Question

O Mailashlyn.cara buc BLINN COLLEGE spter 26 - Mastery Quiz - S. X 138 ushedsalse&cd=5552600&centhayes mat t udent Homework.aspx homeworkld=5338294388 question Ashlyn Carroll & 17/17/19 4:28 301 N21-N22-N25 HW Score: 70.59%, 12 of Tework: Chapter 26 - Mastery Quiz 13 of 17 (13 complete) Score: 0 of 1 pt Checkpoint 3 Problem 2 Question Help The table shows the demand for loanable funds schedule and the supply of loanable funds schedule when the government budget is balanced. Real interest rate (percent per year) If the government budget deficit is $2.0 trillion, what are the real interest rate, the quantity of investment and the quantity of private saving? Is there any crowding out in this situation? Loanable funds Loanable funds demanded supplied (trillions of 2009 dollars per year) 8.5 8.5 8.0 90 9.5 10.0 10.5 11.0 11.5 in If the government budget deficit is $20 trillion, the real interest rate is percent a year OOO o ino o 509 134 174 Sater vout answer in the answer box and then click Check Answer

Answer 1

If the government borrows $2 trillion to cover up the budget deficit, the supply of loanable funds in the market reduces by $2 trillion at every stage. Equilibrium is achieved where supply = demand for loanable funds. In this case, after government borrowing, the equilibrium is at a real interest rate of 6%, where the the quantity of private investment is $7.5trillion.

There is a crowding out of $1 trillion private investment since without government borrowing the equilibrium quantity is at $8.5 trillion at an interest rate of 4%. Government borrowing raises the market interest rates (in this case, by 2%), therefore, making loans costlier to obtain, reducing private investment.