21 May THE GOVERNMENT INCREASES SPENDING ON CURRENT SERVICES.
Analyze the effect of each of the following events on the market for loanable funds in a closed economy in long run equilibrium. In each case, identify the effect on national saving and its components, the level of investment, and the real interest rate.
(a) The government increases spending on current services. [4 marks]
(b) The government institutes an investment tax credit that increases the returns to investment projects and reduces tax revenues. [4 marks]
(c) The economy is opened to international capital flows that allow domestic economic agents to borrow or lend as much as they want at a real interest rate that is below the previous equilibrium value. [4 marks]
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