A country is operating at full employment when its central bank sells bonds on the open market. The country has a limited reserves system. (a) Draw a fully labeled market for loanable funds, illustrating the impact of the securities transaction. (b) Based on the change from part (a), will the quantity demanded of loanable funds in this economy increase, decrease, or remain the same? Explain. (c) How will the change from part (a) affect consumption? (d) How would these changes affect the country's rate of economic growth? Explain. (e) Assume that at the same time that the central bank sold the bonds, the government increased its deficit spending. Indicate the likely short-run impact on each of the following (increase, decrease, remain constant, or indeterminate): i. equilibrium real interest rate ii. equilibrium quantity of loanable funds For each of the following scenarios, illustrate the impact on a fully labeled loanable funds graph. (f) The Fed pursues an expansionary monetary policy. (g) Business owners expect that the inflation rate will significantly increase next year. (h) There is a significant increase in marginal propensity to consume.
