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Due to recent pandemic in country A, the economic activity in this country has decreased substantially causing a significant reduction in government revenues. The country projects a budget deficit of

Due to recent pandemic in country A, the economic activity in this country has decreased substantially causing a significant reduction in government revenues. The country projects a budget deficit of 35 billion dollars next year. The government of Canada borrows $35 billion more next year than this year from the market for loanable funds. a) Use a supply-and-demand diagram to analyze this policy. Does the interest rate rise or fall? Note: make sure you label your diagram properly. (5 marks) b) What happens to investment? To private saving? To public saving? To national saving? Compare the size of the changes to the $35 billions of extra government borrowing. Hints: explain with diagram and/or formula learned. (10 marks) c) How does the elasticity of supply of loanable funds affect the size of these changes? Hints: demonstrate with diagrams. (10 marks) 2 | Page d) How does the elasticity of demand for loanable funds affect the size of these changes? Hints: demonstrate with diagrams. (10 marks) e) 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)?

Apr 19 2021 View more View Less

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