CHAPTER 25 SAVING, INVESTMENT, AND THE FINANCIAL SYSTEM 571 We can analyze the effects of a budget deficit by following our three steps in the market for loanable funds, which is illustrated in Figure 25-4. First, which curve shifts when the budget deficit rises? Recall that national saving—the source of the supply of loanable funds—is composed of private saving and public saving. A change in the government budget deficit represents a change in public saving and, thereby, in the supply of loanable funds. Because the budget deficit does not influence the amount that households and firms want to borrow to finance invest-ment at any given interest rate, it does not alter the demand for loanable funds. Second, which way does the supply curve shift? When the government runs a budget deficit, public saving is negative, and this reduces national saving. In other words, when the government borrows to finance its budget deficit, it reduces the supply of loanable funds available to finance investment by households and firms. Thus, a budget deficit shifts the supply curve for loanable funds to the left from
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