This chapter is an important link in how we understand government policies today in the midst of the Covid-19 crisis. The Federal government is running record deficits in an attempt to avert or minimize a recession/depression. Look back at this chapter and discuss how this should affect the market for loanable funds. Is that what we have seen happen (where is the equilibrium interest rate now – up or down?) You should be left with a question – why have interest rates not increased?
How does the loanable funds market help define/choose which investment projects are funded each year?
Governments running a deficit should lower national saving, affectively lowering the supply of loanable funds, and the equilibrium interest rate should rise. The government deficit borrowing will crowd out households and firms. Though during our Covid19 recession, current interest rates have stayed low. Everyone I know has refinanced their debt to take advantage of the low rates. Interest rates have not increased because the fed wants to keep them low to spur growth through borrowing, and help ease the stress on our unemployment situation. Their need to raise rates will come later to control inflation. Lower rates will in turn spark demand as money becomes cheaper to borrow and risk to take on more debt is reduced.
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