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Assume that the loanable funds market in Country X is currently in equilibrium.. (a)Assume that the government of Country X, which had a balanced budget,
Assume that the loanable funds market in Country X is currently in equilibrium..
- (a)Assume that the government of Country X, which had a balanced budget, now increases its spending while holding taxes constant. Assume that the government funds the increase in spending with increased borrowing.
- (i) What will be the impact of this policy action on the government's budget balance?
- (ii) What is the impact of this policy action on the interest rate and quantity of funds.
- (b)Given your answer in part (a) (ii), how will private-sector interest-sensitive expenditures be affected?
- (c)Given your answer in part (b), what will be the impact on the long-run growth rate of the economy? Explain why.
- (d) What will happen to the LRAS and the PPF? Why?
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