Suppose the Following Equations Give the Demand and Supply for Loanable

question 111

Essay

Suppose the following equations give the demand and supply for loanable funds in billions of dollars; r is the real interest rate in percentage points :
QD = 160-10r
QS = -20 + 20r
a) How do the demand and supply equations change if the government deficit increased by $5 billion?
b) Calculate the new equilibrium interest rate and quantity of loanable funds. (Compare this to the zero-deficit equilibrium.)
c) Calculate the changes in consumer and producer surplus due to the increase in government deficit. Who gains and who loses from the change in government deficit?

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