After you have studied Economics in the News on pp. 174–175, answer the followin
ID: 1212109 • Letter: A
Question
After you have studied Economics in the News on pp. 174–175, answer the following questions. Link to article - www.ft.com/intl/cms/s/0/799f548e-1716-11e4-8617-00144feabdc0.html#axzz47hnctx6O After you have studied Economics in the News on pp. 174–175, answer the following questions.
a. Why does the news article say that bond prices and interest rates move in opposite directions? Is it correct? Explain.
b. How does a government budget deficit influence the loanable funds market and why does a decrease in the deficit lower the real interest rate?
c. When an economic expansion gets going, what happens to the demand for loanable funds and the real interest rate?
d. If an expanding economy increases government tax revenue, how will that affect the loanable funds market and the real interest rate?
e. Looking at Fig. 1 on p. 175, what must have happened to either the demand for or the supply of loanable funds during 2011, 2012, and 2013?
**** Need help with C, D & E.
Explanation / Answer
c. Economic expansion means increase in government spending, due to increase in governmnet spending, the governmnet runs a deficit and therefore needs to borrow from the public, thus supply of lonavle funds increases. The interest rate also increases which leads to crowding out effect.
d. If tax revenue is more than the spending, govt. will need not borrow much from the public, demand for loanable funds will decrease and real interest rate will be reduced.
e. In this figure the supply must have increased due to increased govt spending.