-The above table has the private demand for loanable funds and the private supply of loanable funds schedules. If the government budget surplus is $200 billion, and there is no Ricardo-Barro effect, the equilibrium real interest rate is ________ and the equilibrium quantity of loanable funds is ________.
A) 6 per cent; $600 billion
B) 8 per cent; $700 billion
C) 4 per cent; $500 billion
D) 4 per cent; $700 billion
E) 8 per cent, $500 billion

Question

-The above table has the private demand for loanable funds and the private supply of loanable funds schedules. If the government budget surplus is $200 billion, and there is no Ricardo-Barro effect, the equilibrium real interest rate is ________ and the equilibrium quantity of loanable funds is ________.
A) 6 per cent; $600 billion 
B) 8 per cent; $700 billion 
C) 4 per cent; $500 billion 
D) 4 per cent; $700 billion 
E) 8 per cent, $500 billion

Quizplus · Accepted Answer

A government budget surplus increases the supply of loanable funds, shifting the supply curve to the right. This leads to a lower equilibrium interest rate and a higher equilibrium quantity of loanable funds than would exist without the surplus. Without specific numbers from the table mentioned, the general principle is that an increase in supply of loanable funds due to a government surplus, without the Ricardo-Barro effect (which posits that government budget deficits do not affect the total supply of loanable funds in an economy because individuals save more in anticipation of future taxes), leads to a lower interest rate and higher quantity of loanable funds at equilibrium. Choice D suggests a lower interest rate (4%) and a higher quantity of loanable funds ($700 billion) compared to other options, aligning with the expected outcome of a government surplus on the loanable funds market.

-The Above Table Has the Private Demand for Loanable Funds