Suppose that in China, investment is $400 billion, saving is $400 billion, tax revenues are $500 billion, exports are $300 billion, and imports are $200 billion. The government budget ________ the supply of loanable funds, which ________ the real interest rate and ________ investment.
A)surplus increases; lowers; decreases
B)surplus decreases; raises; increases
C)surplus increases; lowers; increases
D)deficit decreases; raises; decreases
E)surplus increases; raises; decreases

Question

Quizplus · Accepted Answer

The government budget surplus increases when tax revenues exceed government spending. In this case, tax revenues are $500 billion and there is no information provided about government spending, so we can assume there is a surplus. A government budget surplus increases the supply of loanable funds because the government is saving more than it is spending, which means there is more money available to lend. An increase in the supply of loanable funds lowers the real interest rate because there is less competition for loans. Finally, a lower real interest rate increases investment because it makes borrowing cheaper and more attractive to investors.

Suppose That in China, Investment Is $400 Billion, Saving Is