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4. Suppose the government borrows Php 100 billion more next year than this year. Use a supply-and-demand diagram to analyze this policy. Does the interest rate rise
or fall? (3 pts: min 20 words) What happens to investment? To private saving? To public saving? To national
saving? Compare the size of the changes to the Php 100 billion of extra government
borrowing. (5 pts: min 50 words] How does the elasticity of supply of loanable funds affect the size of these changes?
(5 pts: min 50 words) How does the elasticity of demand for loanable funds affect the size of these
changes? (5 pts: min 50 words) Suppose households believe that greater government borrowing today implies
higher taxes to pay off the government debt in the future. What does this belief do to
private saving and the supply of loanable funds today? Does it increase or decrease
the effects you discussed in parts (a) and [b]? (8 pts: min 100 words)

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