1- When the government is in a need of cash to finance its operations and decided to
borrow from the local financial market of Loanable funds. The demand curve will shift to
the right, then we will have a shortage in Loanable funds and the market will correct itself
by increasing the interest rate and finally reach to a new equilibrium point of interest rate
and quantity of funds.
2- If government imposed an additional tax on fuel purchased by factories and production
entities that operate inside the country and economy operating in a state of short-run
equilibrium, this will increase the cost of production, therefore profit will decrease and
suppliers became discouraged to increase their production, hence SRAS decreases and
shifts leftward. The economy moves from one point (A) to point (B) indicating lower
output and higher prices, this is an economic situation called Stagflation since there was a
falling output therefore decrease in GDP (Recession)and rising prices (Inflation).
3- a- The unstable security situation that led the government to announce and finalize a
deal to buy new fighter planes and missiles, this event, will make many people lose
confidence in the future, and alter their plans, and the immediate effect of this pessimism is
that households and firms decrease their spending on goods and services, consequently AD
decreases and shifts downward, and the economy will be now operating at point (E1).
The effect of this economic event on economy equilibrium is:
– Decrease in prices.
– GDP remains constant at Potential GDP as the economy is in a state of long-run
