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Currently, the US seems poised to exit the Great Recession. Suppose that in the long run,...

Currently, the US seems poised to exit the Great Recession. Suppose that in the long run, the US economy will experience strong, sustained economic growth over the next decade. a. Using the loanable funds model, determine whether real interest rates would increase/decrease/uncertain. b. From your diagram(s) in the previous part, determine whether the capital stock, K, in the US economy would increase/decrease/uncertain.

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More growth leads to more demand for loanable funds. Hence demand shifts from Do to D1. As a result interest rate rises from R1 to r2.

One will argue that interest rate increase leads to fall in capital. But this is not true. Here shift occurs which also increases quantity of loanable funds traded. Hence capital stock will increase

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