(A) The government increases spending without raising taxes.
(Assume that the government is already running a deficit.)
Loanable Funds
Real Interest Rate
SLF1
r2
r1
DLF2
0
DLF1
QLF1
QLF2
Quantity of Loanable Funds
(B) The government increases tax rates on income from interest
payments.
Real Interest Rate
Loanable Funds
SLF2
SLF1
r2
r1
0
DLF1
QLF2 QLF1
Quantity of Loanable Funds
(C) The government decreases taxes without decreasing
spending. (Assume that the government is already running a
deficit.)
Loanable Funds
Real Interest Rate
SLF1
r2
r1
DLF2
0
DLF1
QLF1
QLF2
Quantity of Loanable Funds
(D) A medical study comes out showing that people are living
longer than before, which encourages people to save more for
retirement.
Loanable Funds
Real Interest Rate
SLF1
SLF2
r1
r2
0
DLF1
QLF1 QLF2
Quantity of Loanable Funds
(E) The government increases the portion of their income that
individuals can invest in their retirement account each year
without paying taxes on it.
Loanable Funds
Real Interest Rate
SLF1
SLF2
r1
r2
0
DLF1
QLF1 QLF2
Quantity of Loanable Funds
(F) The government offers a tax incentive to businesses that
invest in plant and equipment.
Loanable Funds
Real Interest Rate
SLF1
r2
r1
DLF2
0
DLF1
QLF1
QLF2
Quantity of Loanable Funds
(G) Personal savings rates in America increase, for whatever
reason.
Loanable Funds
Real Interest Rate
SLF1
SLF2
r1
r2
0
DLF1
QLF1 QLF2
Quantity of Loanable Funds
(H) Penn State University releases a report that real GDP will
increase less than previously thought this year.
Loanable Funds
Real Interest Rate
SLF1
r1
r2
DLF1
0
DLF2
QLF2
QLF1
Quantity of Loanable Funds
(I) The government decreases spending without decreasing taxes.
(Assume the government was running a deficit.)
Loanable Funds
Real Interest Rate
SLF1
r1
r2
DLF1
0
DLF2
QLF2
QLF1
Quantity of Loanable Funds
(J) OK, let’s try to tie this back to monetary policy: the Federal Reserve
buys bonds on the open market. This works a little differently than the
previous examples, but see if you can figure it out.
Loanable Funds
Real Interest Rate
SLF1
SLF2
r1
r2
0
DLF1
QLF1 QLF2
Quantity of Loanable Funds