Suppose the government borrows $20 billion more next year than this year. a. Use a

Chapter 26, Problem Problems and Applications 26.8

(choose chapter or problem)

Suppose the government borrows $20 billion more next year than this year. a. Use a supply-and-demand diagram to analyze this policy. Does the interest rate rise or fall? b. What happens to investment? To private saving? To public saving? To national saving? Compare the size of the changes to the $20 billion of extra government borrowing. c. How does the elasticity of supply of loanable funds affect the size of these changes? d. How does the elasticity of demand forloanable funds affect the size of thesechanges?e. Suppose households believe that greatergovernment borrowing today implies highertaxes to pay off the government debt in thefuture. What does this belief do to privatesaving and the supply of loanable fundstoday? Does it increase or decrease the effectsyou discussed in parts (a) and (b)?

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