Sia
Question
Microeconomics
Posted 7 months ago
The economy of Marthaland had a balanced budget, but an economic boom increased tax revenues.
Which of the following should be used to show the effect of the increase in tax revenues on interest rates in Marthaland?
Choose 1 answer:
(A) The aggregate demand-aggregate supply, or AD-AS, model
(B) The money market
(c) The market for loanable funds
(D) The circular flow diagram
(E) The production possibilities curve
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Answer from Sia
Posted 7 months ago
Solution
a
Market for Loanable Funds: The market for loanable funds is the most appropriate model to show the effect of an increase in tax revenues on interest rates. This model illustrates the interaction between borrowers and lenders, determining the equilibrium interest rate
b
Increased Tax Revenues: An economic boom increases tax revenues, which can lead to a budget surplus. This surplus can increase the supply of loanable funds as the government may save or pay down debt, increasing the funds available for lending
c
Supply Shift: The increase in tax revenues shifts the supply curve of loanable funds to the right. This shift results in a lower equilibrium interest rate, assuming demand for loanable funds remains constant
d
Interest Rate Impact: The decrease in interest rates makes borrowing cheaper, potentially stimulating investment and consumption
Answer
(C) The market for loanable funds
Key Concept
Market for Loanable Funds
Explanation
The market for loanable funds is used to analyze the impact of changes in savings and investment on interest rates. An increase in tax revenues can lead to a higher supply of loanable funds, reducing interest rates.
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