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Suppose the Federal Government Is Successful in Reducing the Budget

question 40

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Suppose the federal government is successful in reducing the budget deficit,households decide to increase their saving,corporate taxes are reduced,and businesses expect to see an increase in future profits.Use the loanable funds model to explain how each of these events affects the demand and supply of loanable funds and illustrate your answer with a graph.Describe what should happen to the equilibrium real interest rate and the equilibrium levels of saving and investment.


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