Lab
Draw the Loanable Funds Graph
Each situation changes the demand for or the supply of loanable funds first. Label both axes and name both curves, choose what moves, drag it the way the situation pushes it, then drag the round point to the new equilibrium and check your graph. Label the real interest rate r1 and r2 and the quantity Q1 and Q2.
Challenges
- Before you check each graph, say which way the real interest rate and the quantity of loanable funds will move.
- Draw the budget deficit both ways the exam accepts. Do the two graphs agree about the real interest rate? About the quantity?
- Why is the vertical axis the real interest rate here, when the money market uses the nominal rate?