Question 1
a) Draw a graph representing the market for loanable funds. Assume inelastic supply of loanable funds. Make sure to label axes, curves, and equilibrium. Write down equations for each of the curves.
b) Interpret the slope of the demand for loanable funds curve.
Show the slope using calculus tools.
c) Interpret the slope of the supply of loanable funds curve.
Show the slope using calculus tools.
In 2020, the COVID pandemic has spread around the world. There is little doubt that the dramatic effects of the pandemic affect many aspects of the economy. For the problem below, focus only on the changes in the two sectors of the US economy and keep the other factors fixed. The first sector is Consumer Staples (such as groceries) and the second sector is Consumer Discretionary (such items as travel, restaurants, and cars).
d) Use the diagram to illustrate effects of the pandemic on the US economy under the assumption that a contraction of the Consumer Discretionary sector is greater in absolute terms than an expansion of the Consumer Staples sector. You may use the graph from part (a). How the new equilibrium is different from the old equilibrium?
e) Draw a new LF model diagram, such as you draw for part (a). Illustrate effects of the pandemic on the US economy under the assumption that a contraction of the Consumer Discretionary sector in absolute terms is smaller than an expansion of the Consumer Staples sector. How the new equilibrium is different from the old equilibrium?
f) In the loanable funds model, the interest rate is affected once macro variables change. However, there is no central bank and/or monetary policy in this model. ELI5 the intuition for the interest rate changes in parts (d) and (e). NOTE: You can request via email a hint that I designed to help you answer this question. In this case, you receive a “hint-used” mark that reduces the bonus points you earn (but it does not turn the bonus points negative).