Figure 18-3.The figure shows two demand-for-loanable-funds curves and two supply-of-loanable-funds curves.
-Refer to Figure 18-3.Which of the following movements shows the effects of the government going from a budget deficit to a budget surplus?

Question

Figure 18-3.The figure shows two demand-for-loanable-funds curves and two supply-of-loanable-funds curves. 
-Refer to Figure 18-3.Which of the following movements shows the effects of the government going from a budget deficit to a budget surplus?

Quizplus · Accepted Answer

When the government goes from a budget deficit to a budget surplus, it reduces its demand for loanable funds, which shifts the demand-for-loanable-funds curve to the left. Additionally, the government is less likely to issue Treasury securities, reducing the supply of loanable funds, shifting the supply-of-loanable-funds curve to the left. This results in a decrease in the equilibrium quantity of loanable funds and an increase in the equilibrium interest rate, as seen by the movement from Point B to Point A in the figure.