Consider a closed economy (with no foreign trade). Assuming the economy is in equilibrium, use the following information to determine the amount of funds supplied to the loanable funds market.
$\begin{array}{ll}
\text { Consumption Spending } & € 350 \text { billion } \
\text { Net Taxes } & € 270 \text { billion } \
\text { Household Saving } & € 250 \text { billion } \
\text { Investment Spending } & € 220 \text { billion } \
\text { Government Purchases } & € 300 \text { billion }
\end{array}$
A) €220 billion
B) €250 billion
C) €270 billion
D) €300 billion

Question

Consider a closed economy (with no foreign trade). Assuming the economy is in equilibrium, use the following information to determine the amount of funds supplied to the loanable funds market. 
$\begin{array}{ll}
\text { Consumption Spending } & € 350 \text { billion } \
\text { Net Taxes } & € 270 \text { billion } \
\text { Household Saving } & € 250 \text { billion } \
\text { Investment Spending } & € 220 \text { billion } \
\text { Government Purchases } & € 300 \text { billion }
\end{array}$
A) €220 billion
B) €250 billion
C) €270 billion
D) €300 billion

Quizplus · Accepted Answer

In a closed economy, the total funds supplied to the loanable funds market come from households, which can consume or save their disposable income, and from the government, which can spend more or less than its net tax revenue. Investment spending also affects the demand for loanable funds, but it does not determine the funds supplied. Therefore, the funds supplied equals household saving plus government budget surplus, which is the difference between government purchases and net taxes.

Funds supplied = Household saving + Government budget surplus
= €250 billion + (€300 billion - €270 billion)
= €250 billion + €30 billion
= €280 billion

However, the question asks for the amount of funds supplied in equilibrium, which must equal the funds demanded by investors for financing investment spending. Since investment spending is €220 billion, the only choice that is closest to this amount is B) €250 billion. This suggests that investment spending is financed mainly by household saving, and the government budget surplus contributes to reducing the interest rate, making it easier for investors to borrow.

Consider a Closed Economy (With No Foreign Trade) A) €220 Billion B) €250 Billion C) €270 Billion D)

Consider a Closed Economy (With No Foreign Trade) A) €220 Billion
B) €250 Billion
C) €270 Billion
D)