Loanable funds crowding out

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Loanable funds crowding out

  1. 1. 1. What happened to the nominal interest rate in this market? 2. Identify two possible causes of this Interest Supply Rate 6% 5% Demand $1,200 $1,300 Loanable Funds
  2. 2. Real interest rate • Easy just …. • Real i = nominal i - CPI (or inflation rate) • So in theory….. • Nominal rate 3.5 %, CPI: 3.5% OR • Nominal rate 8.5 %, CPI: 10 %
  3. 3. Graph on the white “boards” Market conditions change so business increase capital spending Fed buys $3 TRILLION worth of bonds during Open Market Operation Consumers spend 5%, but economy is at “full employment” Unemployment rate jumps from 6 % to 12% US government deficit spends
  4. 4. Paradox of thrift
  5. 5. Crowding out effect
  6. 6. Gov debt as a percent of GDP
  7. 7. Graph on page 571

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