During the late 1990s, U.S. asset markets were growing rapidly, making the United States attractive to foreign savers. At the same time, strong economic growth made firms optimistic about the future, and the government was reducing the size of its budget deficit.
a. Use the loanable funds model to show the probable effect of these events on interest rates and the quantity of loanable funds.
b. Use your results from part a. to explain why the U.S. trade deficit grew rapidly during this period.