Figure 26-3.The figure shows two demand-for-loanable-funds curves and two supply-of-loanable-funds curves.
-Refer to Figure 26-3.Which of the following movements shows the effects of the government going from a budget deficit to a budget surplus?

Question

Figure 26-3.The figure shows two demand-for-loanable-funds curves and two supply-of-loanable-funds curves. 
-Refer to Figure 26-3.Which of the following movements shows the effects of the government going from a budget deficit to a budget surplus?

Quizplus · Accepted Answer

If the government goes from a budget deficit to a budget surplus, it means that it is spending less than it is taking in. This reduces its demand for loanable funds, which would shift the demand-for-loanable-funds curve to the left, from DLF1 to DLF2. At the same time, the government is no longer issuing as many bonds to finance its deficit, so the supply of loanable funds shifts to the right, from SLF1 to SLF2. The result is a movement from Point B to Point A, where the equilibrium interest rate falls and the equilibrium quantity of loanable funds decreases.