Macro Unit 5 Graphs

When the government runs a deficit, which market does it impact?

• Money Market
• Reserve Market
• Market for Loanable Funds

Answer explanation

In the Market for Loanable Funds, the S curve is made up of public savings, private savings, and international savings. A deficit is a decrease in public savings, which decreases S.

NOTE: Some teachers and textbooks have a deficit increase the demand for loanable funds rather than decrease the supply. Either way, you end up with higher interest rates. Whichever way you learned, stick with that.

When the Fed sells bonds, this affects which market(s)?

• Money Market
• Reserve Market
• Market for Loanable Funds

Answer explanation

Selling bonds impacts both the money supply (Money Market) and the amount of reserves (Reserve Market). It does this by giving bonds to the banks in exchange for cash that would otherwise be in the vault.

When the Fed changes interest on reserves, which market does this affect?

• Money Market
• Reserve Market
• Market for Loanable Funds

Answer explanation

Interest on Reserve Balances is the lower limit on the Demand for Reserves curve. It is one of the rates that is directly changed by the Fed.

Monetary policy affects which market(s)?

• Money Market
• Reserve Market
• Market for Loanable Funds

Answer explanation

Monetary policy is changing the amount of money there is in the economy. In an economy of limited reserves, the Fed does this through buying and selling bonds (which impacts the Supply curve in the Money Market and the Supply curve in the Reserve Market). In an economy of ample reserves, the Fed does this by changing the interest paid on reserve balances (which impacts the demand curve in the Reserve Market).

Fiscal policy affects which graph(s)?

• Money Market
• Reserve Market
• Market for Loanable Funds

Answer explanation

Fiscal policy is the changing of gov spending and taxes. Whenever the government does this, it changes the public savings rate (either by running a deficit or a surplus), which changes the supply curve in the Market for Loanable Funds. This can then lead to crowding out.

NOTE: Some teachers and textbooks have fiscal policy impacting the demand for loanable funds rather than the supply. Whichever way you learned, stick with that.

If an economy is in ample reserves, which of these graphs no longer works?

• Money Market
• Reserve Market
• Market for Loanable Funds

Answer explanation

Remember, Open Market Operations moves the supply curve in the Money Market and in the Reserve Market. But if the Supply of Reserves curve is in the ample reserve area (far right side of the Reserve Market graph), then changing the amount of reserves won't actually change the interest rate anymore, since Demand is flat there.

If the Fed changes the discount rate, what moves?

• Dm
• Dr
• D(LF)
• S(LF)

Answer explanation

In the Reserve Market, a change in the Discount Rate would move the upper portion of the demand curve

If the government changes the tax structure to incentivize more investment, which curve moves?

• Dm
• Dr
• D(LF)
• S(LF)

Answer explanation

The Demand for Loanable Funds represents businesses' desire to invest at various interest rates. Anything that changes the desire to invest (such as lower taxes for investment) would make investment more attractive at any interest rate, thus increasing D(LF)

If the public increases their savings rate, which curve moves?

• Dm
• Dr
• D(LF)
• S(LF)

Answer explanation

In the Market for Loanable Funds, the S curve is made up of public savings, private savings, and international savings. A change in public savings will change the S curve.

If the Fed changes the reserve requirement, which curve(s) move(s)?

• Dm
• Sm
• Dr
• Sr

Answer explanation

This is monetary policy, which always moves the supply curves in the Money Market and the Reserve market. In other words, anything that changes the amount of cash that banks want to hold in the vault (such as changing the reserve requirement) will impact both how much reserves there are in the economy (SR) and how much money there is in the economy (SM).