Figure 18-1
-Refer to Figure 18-1.Suppose that the U.S.government deficit causes interest rates in the United States to rise relative to those in the European Union.Assuming all else remains constant,how would this be represented?
A)Supply would decrease,demand would decrease and the economy moves from B to C to D.
B)Supply would increase,demand would decrease and the economy moves from C to B to A.
C)Supply would decrease,demand would increase and the economy moves from A to D to C.
D)Supply would increase,demand would increase and the economy moves from D to A to B.

Question

Figure 18-1 
-Refer to Figure 18-1.Suppose that the U.S.government deficit causes interest rates in the United States to rise relative to those in the European Union.Assuming all else remains constant,how would this be represented?
A)Supply would decrease,demand would decrease and the economy moves from B to C to D. 
B)Supply would increase,demand would decrease and the economy moves from C to B to A. 
C)Supply would decrease,demand would increase and the economy moves from A to D to C. 
D)Supply would increase,demand would increase and the economy moves from D to A to B.

Quizplus · Accepted Answer

If the U.S. government deficit causes interest rates to rise relative to those in the European Union:

- The supply of loanable funds in the United States would decrease because individuals and firms would be less willing to save money or invest in the country at a higher interest rate.
- At the same time, the demand for loanable funds in the United States would increase because borrowing becomes more expensive and individuals and firms may require more money to finance their projects or purchases.
- This would lead to an increase in the interest rate and a decrease in the quantity of loanable funds demanded and supplied in the country.
- In contrast, in the European Union, where interest rates remain lower, the supply of loanable funds would increase as people and firms try to take advantage of the higher rates in the United States, while the demand for loanable funds would decrease for the same reasons as above.
- This would result in a shift of the supply and demand curves for loanable funds, causing a new equilibrium (C) with a higher interest rate and a lower quantity of loanable funds exchanged in the United States.

Therefore, the correct answer is C.

Figure 18-1 -Refer to Figure 18-1.Suppose That the U.S.government Deficit Causes Interest