Do Now:

Investment curve handout

Draw a fully labeled graph of a loanable funds market

including the savings and investment curves

Describe the relationships between real interest rates

and the quantity invested and the quantity saved

For each, why is this the case?

What is the difference between a movement along the savings or investment

curve and a shift in the curve?

Which factors influence savings rates (other than real

interest rates)?

Which factors influence the level of economic investment

(other than real interest rates)?

Scenario #1 Decrease in Public Savings:

• Government spending on goods and services (G) increases, leading to an increased budget deficit.

• Draw (on the graph) and explain (in writing) the effects on the loanable fund market, including the change in the equilibrium (if any).

Scenarios:

• Government spending on goods and services (G) increases, leading to an increased budget deficit.

• Draw (on the graph) and explain (in writing) the effects on the loanable fund market, including the change in the equilibrium (if any).

Based on this, what is the net effect on real GDP of an increase in Government Spending (refer to the expenditure approach

equation for GDP in your answer)”

Scenario #2: New technology makes capital investment

more profitable• During the 1990s, breakthroughs in IT

technology made computer based capital investments much more profitable for many firms.

• Graph and explain the effect that this had on the savings and investment curves, including the change in the equilibriums

Scenario #3: The Wealth Effect

• During the mid-2000s, the rapid increase in housing values during the real estate bubble made many feel much more wealthy.

• Graph and explain the effect that this would have on the loanable funds market

Come up with one other scenario that would result in

either a shift in the investment or savings curve, and graph

and explain it.