Question

21 mark for review country xs economy is enjoying political stability and attracting an increase in foreign financial capital. at the same time country xs government is borrowing to finance spending. how will these changes affect the loanable funds market in country x? a there will be a decrease in the supply of loanable funds. b there will be a decrease in the demand for loanable funds. c there will be an increase in the equilibrium nominal interest rate. d there will be an indeterminate effect on the equilibrium real interest rate. e there will be an indeterminate effect on the equilibrium quantity of loanable funds.

Explanation:

1. Supply of loanable funds: Increased foreign financial capital inflows increase the supply of loanable funds, shifting the supply curve right.
2. Demand for loanable funds: Government borrowing to finance spending increases the demand for loanable funds, shifting the demand curve right.
3. Equilibrium real interest rate: A rightward supply shift lowers rates, while a rightward demand shift raises rates. The net effect depends on the magnitude of each shift, making the real interest rate change indeterminate.
4. Equilibrium quantity: Both a rightward supply and demand shift increase the equilibrium quantity of loanable funds, so this effect is definite (not indeterminate).
5. Nominal interest rate: Since the real interest rate change is indeterminate, and nominal interest rate = real interest rate + expected inflation, the nominal rate's change is also indeterminate.

Answer:

D. There will be an indeterminate effect on the equilibrium real interest rate.