Question

Real interest rate (percent per year) 9.07 SLF The graph shows the supply of loanable funds and the demand for loanable funds in an economy Suppose the government has a budget deficit of $0.2 trillion and the Ricardo-Barro effect holds. Draw the new demand for loanable funds curve. Label it. Draw the new supply of loanable funds curve. Label it. Draw a point that shows the equilibrium quantity of loanable funds and interest rate. The Ricardo-Barro effect is the proposition that O A. a budget deficit crowds out investment OB. the budget deficit has no effect on the real interest rate or investment OC. the government cannot maintain a budget deficit OD. government saving is positive when the government has a budget surplus DLF 07 08 09 10 11 12 13 14 Loanable funds (trillions of 2009 dollars per year) >>> Draw only the objects specified in the question.

Answer 1

Real Interest rates (Percent per you) SLF SLFI DLFI DLFO 0.7 0.8 0.9 1.0 1.1 1.2 1.3 lote (Roomable funds (bellione of 2009 dollars per you When the budget increases by $0.2 trillion, the demand for loanable funds increases and the DLF curve shifts rightward by $0.2 trillion, from Dafo to DLF. There would be an excess demand at the same interest rate of 6%. The total quantity of funds demanded, would be $1.2. Consequent to this, the tax payers increases the sawings and ultimately the supply of banable funde also increases from Info to SLF, Chowding out is avoided. B in the new equilibrium point. The Ricardo Barro effect is the proposition that A. a budget deficit crowds out investment.