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Loanable Funds

(A) The government increases spending without raising taxes. (Assume that the government is already running a deficit.). Loanable Funds. S LF 1. r2. Real Interest Rate. r1. D LF 2. D LF 1. 0. Q LF 1. Q LF 2. Quantity of Loanable Funds.

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Loanable Funds

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  1. (A) The government increases spending without raising taxes. (Assume that the government is already running a deficit.) • Loanable Funds • SLF1 r2 Real Interest Rate r1 • DLF2 • DLF1 0 • QLF1 • QLF2 Quantity of Loanable Funds

  2. (B) The government increases tax rates on income from interest payments. • Loanable Funds • SLF2 • SLF1 r2 Real Interest Rate r1 • DLF1 0 • QLF1 • QLF2 Quantity of Loanable Funds

  3. (C) The government decreases taxes without decreasing spending. (Assume that the government is already running a deficit.) • Loanable Funds • SLF1 r2 Real Interest Rate r1 • DLF2 • DLF1 0 • QLF1 • QLF2 Quantity of Loanable Funds

  4. (D) A medical study comes out showing that people are living longer than before, which encourages people to save more for retirement. • Loanable Funds • SLF1 • SLF2 Real Interest Rate r1 r2 • DLF1 0 • QLF1 • QLF2 Quantity of Loanable Funds

  5. (E) The government increases the portion of their income that individuals can invest in their retirement account each year without paying taxes on it. • Loanable Funds • SLF1 • SLF2 Real Interest Rate r1 r2 • DLF1 0 • QLF1 • QLF2 Quantity of Loanable Funds

  6. (F) The government offers a tax incentive to businesses that invest in plant and equipment. • Loanable Funds • SLF1 r2 Real Interest Rate r1 • DLF2 • DLF1 0 • QLF1 • QLF2 Quantity of Loanable Funds

  7. (G) Personal savings rates in America increase, for whatever reason. • Loanable Funds • SLF1 • SLF2 Real Interest Rate r1 r2 • DLF1 0 • QLF1 • QLF2 Quantity of Loanable Funds

  8. (H) Penn State University releases a report that real GDP will increase less than previously thought this year. • Loanable Funds • SLF1 r1 Real Interest Rate r2 • DLF1 • DLF2 0 • QLF2 • QLF1 Quantity of Loanable Funds

  9. (I) The government decreases spending without decreasing taxes. (Assume the government was running a deficit.) • Loanable Funds • SLF1 r1 Real Interest Rate r2 • DLF1 • DLF2 0 • QLF2 • QLF1 Quantity of Loanable Funds

  10. (J) OK, let’s try to tie this back to monetary policy: the Federal Reserve buys bonds on the open market. This works a little differently than the previous examples, but see if you can figure it out. • Loanable Funds • SLF1 • SLF2 Real Interest Rate r1 r2 • DLF1 0 • QLF1 • QLF2 Quantity of Loanable Funds

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