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Loanable funds crowding out

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  • 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$1,300Loanable Funds

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. 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. Paradox of thrift 5. Crowding out effect 6. Gov debt as a percent of GDP 7. Graph on page 571

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