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Question

EFN405 Oral presentation on Lecture 11




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Note: The real interest rate is equal to the nominal interest rate minus inflation. (You don't need to pay attention to this distinction for the questions; this is additional info just for your understanding.)


Questions:


a)     When an economic expansion gets going (i.e., an increase in economic activity), what happens to the demand for loanable funds and the interest rate?

b)     Looking at Figure 2, what are the reasons mentioned in the article for the increase in supply of loanable funds to SLFJun?

c)     How does a government budget deficit influence the loanable funds market, and why does a decrease in the deficit lower the interest rate? (Hint: There are two ways to model a government budget deficit: (1) as impacting supply, as discussed in the lecture notes, or (2) as impacting demand, as in Figure 2. You may use either approach. The result on interest rate is the same.)

d)     Looking at Figure 1, what do you think happened to either the demand for or the supply of loanable funds during 2011, 2012 and 2013?

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