Macroeconomics Chapter 8

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Equilibrium in the loanable funds market maximizes efficiency because is ensures that everyone that needs funds will be able to get them. It means that investments with a higher rate of return are funded first. However, private savers that have the lower opportunity cost will have their loans accepted before those with a higher opportunity cost of funds. The loanable funds market maximizes the gains from trade between lenders and borrowers. No one is left out everyone benefits.

Through its institutions and policies the United States has been able to continue its economic growth. Our country has excellent laws and establishments that enforce those laws and a stable political system and all of this helps us to protect our property. Our government supports economic growth by supporting public education and research and development. Our large (and constantly growing) borrowing will end up reducing private investing and if that happens it will slow down economic growth. The best thing for growth is investment capital and if we keep running up a large debt the funding of that debt takes away from or “crowds out” private investments.

If the government reduces its deficit to zero there will be a decrease in demand for loanable funds. The reduction will be equal to the reduction in the size of the deficit. Because of a decrease in demand the interest rate falls. This in turn will increase private investment spending and decrease private savings. When consumers decide to save more there will be an increase in the supply of loanable funds. This would make a shift to the right for the supply curve. This will reduce the equilibrium of the interest rate. This now means private spending will increase. If we have higher investment spending at any given interest rate that would lead to an increase in demand for loanable funds. This will increase the equilibrium interst rate from r1 to r2. Then because of the higher interest rate private savings will...
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