III. Government in the Market for Loanable Funds

A Government Budget Surplus

• Changes in the government surplus can shift the supply of loanable funds curve. In the figure, PSLF is the private supply of loanable funds curve. The government has a budget surplus equal to the length of the arrow ($0.4 trillion). The surplus adds to private saving and so the supply of loanable funds curve becomes SLF. Without the budget surplus, the real interest rate is 6 percent and the quantity of loanable funds and investment is $1.4 trillion; with a budget surplus, the real interest rate is 5 percent and the quantity of loanable funds and investment is $1.6 trillion.

A Government Budget Deficit

• Changes in the government deficit can shift the demand for loanable funds curve. In the figure, PDLF is the private demand for loanable funds curve. The government has a budget deficit equal to the length of the arrow ($0.4 trillion). The deficit adds to private demand and so the demand for loanable funds curve becomes DLF. Without the budget deficit, the real interest rate is 5 percent and the quantity of loanable funds and investment is $1.6 trillion; with the budget deficit, the real interest rate is 6 percent, the quantity of loanable funds is $1.8 trillion, and investment is $1.4 trillion.
• The tendency for a government budget deficit to decrease investment is called a crowding-out effect.
• The possibility that a budget deficit increases private saving supply in order to offset the increase in the demand for loanable funds is called the Ricardo-Barro effect. The reasoning behind this effect is that taxpayers will save to pay higher future taxes that result from the deficit. To the extent that the Ricardo-Barro effect occurs, it reduces the crowding-out effect because the SLF curve shifts rightward to offset the deficit.

Дата добавления: 2015-11-04