answer of assignment

Topics: Money, Monetary policy, Fractional-reserve banking Pages: 3 (658 words) Published: October 19, 2014
Group member Name : Huajiu LI Student ID : LIHD1401 Sala uddin Khan KHANSD1302

Figure 23.2.5

1) Refer to Figure 23.2.5. In Figure 23.2.5, the supply of loanable funds curve is SLF0 and the demand for loanable funds curve is DLF0. An expansion that increases disposable income and expected profit will lead to a higher or lower real interest rate, why? The answer: 1)First of all, other things remaining the same, the greater the expected profit from the new capital, the greater is the amount of the investment and the greater the demand for loanable funds. So an increase in expected profit will shift loanable demand to right . As we can see from the graph , DLF0 will shift to DLF1.The point (1, 6) will change to the point (1.5, 8) . 2) Then, the greater a household’s disposable income, other remaining the same , the greater is its saving . Saving is the main item that makes up the supply of loanable funds. So , an increase in disposable income will shift SLF0 to SLF1. The point will vary from ( 1.5, 8) to ( 2,6) 3) In conclusion, the real interest rate remains the same level at 6(percent per year).

2) If China's government increases its budget surplus, there is an increase in the supply of loanable funds, how does it affect private saving and investment? Explain the reason. The answer: china’s government budget surplus increases the supply of loanable funds . The supply curve will shift to right. So , the real interest rate falls, which decreases the quantity of private saving. The lower interest rate increases the quantity of loanable funds demanded and increases investment.

3) In an individual economy that is integrated into the global market, the demand for loanable funds is determined by the country’s demand and the supply of loanable funds is determined by the world’s supply. If a country has a shortage of loanable funds at the world real interest...
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