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Suppose the Following Equations Give the Demand and Supply for Loanable

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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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Definitions:

Restricted Fund Method

An accounting principle used by non-profit organizations, where donations or grants are kept in separate accounts and are spent only according to donors' stipulations.

Capital Fund

A financial resource that is used for the purchase of fixed assets or for significant investment in a business, not consumed in normal operations.

Restricted Contribution

A donation given to an organization with explicit limitations on its use by the donor.

Fixed Assets

Fixed assets, also known as non-current assets, are long-term tangible assets that are used in the operations of a business and are not expected to be consumed or converted into cash within a year.

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