Question

If the government reduces transfer payments, what happens to the budget deficit? What curve does this change in the market for loanable funds, which direction does it shift, and what happens to the equilibrium interest rate?

Answer 1

Answer:

• The budget deficit will decrease
• The curve it changes is the loanable funds curve
• The loanable funds curve shifts to the right
• The equilibrium interest rate falls

Explanation:

The reduction in transfer payments by Government will cause the budget deficit of the Government to decrease and also the the decrease in the Budget deficit will lead to the availability of loanable funds thereby causing the loanable funds curve to shift to the right.

With the availability of loanable funds the equilibrium interest rate will fall below its usual equilibrium level.and the Government can reduces transfer payments to achieve all of this.