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Loanable funds market changes from the initial equilibrium

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Reference no: EM132476294

For the Kingdom of Wakanda, which is a closed economy, total output is equal to $30 billion and consumption equals $15 billion. The Wakandan government spends $5 billion and has a budget surplus of $1 billion.

1) Find government saving, taxes, private saving and national saving.

2) Suppose now the Wakandan government cuts taxes by $1 billion. Assume that total output, initial consumption, and government spending are as specified previously. Determine the new values of taxes, consumption, government saving, private saving, and national saving if Wakandan consumers save 1/2 of the tax cut and spend the other 1/2.

3) Use the loanable funds market to analyze the situation presented in question 2 (i.e. a tax cut). Graphically illustrate how the loanable funds market changes from the initial equilibrium to a new equilibrium after the tax cut. State whether the interest rate increased or decreased due to the tax cut.

4) Assume now that the supply for loanable funds in Wakanda has become more elastic (i.e. households are more sensitive to changes in interest rates when they make saving decisions). Is the change in interest rate and loanable funds caused by the tax cut larger or smaller than what you illustrated in question 3?

Reference no: EM132476294

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