ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -So, if there is a deficit, the demand for loanable funds will increase because the government gets in line to borrow money just like all of the other borrowers. Deficits decrease the supply of loanable funds; surpluses increase the supply of loanable funds.

Detailed explanation-2: -A government budget deficit increases the demand for loanable funds. The increase in the demand of loanable funds raises the real interest rate, which increases the quantity of private funds supplied.

Detailed explanation-3: -If there is a decrease in the supply of loanable funds, interest rates rise and a decrease in economic growth will result. On the flip side, when interest rates are low, there is an increase in the quantity of investment and economic growth increases.

Detailed explanation-4: -What would happen in the market for loanable funds if the government were to increase the tax on income earned from interest paid on savings? If interest income is taxed then savings become less attractive. This will lead to a reduction in saving and therefore, the supply of loanable funds.

Detailed explanation-5: -A government budget deficit will increase the demand for loanable funds because it will need to borrow the additional funds. The higher demand leads to an increase in the real interest rate and the quantity of private loanable funds supplied.