Kyle Wu
Student ID: 2310368
Econ 411—Problem Set 2
Sept. 29th, 2020
1. [Q.1 in Chapter 4] Using the loanable funds theory, show in a graph how each of
the following events affects the supply and demand for loans and the equilibrium
real interest rate:
(a) A war leads the government to increase spending on the military. (Assume taxes
do not change.)
An increased amount of government spending and a constant tax revenue will
lead to a decrease in public savings. This decrease in public savings will lead
to a leftward shift in the supply of loanable funds and an increase in the real
interest rate. As real interest rate rises, the quantity of loans demanded will
decrease.
(b) Wars in other countries lead to higher government spending in those countries.
A higher level of government spending in countries at war will lead to a higher
