The Loanable Funds Market and Government Expenditures - Assignment Example

When a country is faced with the threat of war, it compels the government purchases some military equipment which consequently induces the need for bonds to settle the expenditures.

a. Effects of the scenario above on the loanable funds market.
Since public savings is one of the major sources of the loanable funds market, its deterioration would cause a negative impact on the funds. When we have government spending surpassing the tax collection, it means there are minimal government savings and this leads to a decrease in funds as it has to fund what tax is not able to cover (Mankiw 2011). However, when the governments refund the loanable funds market with significant profits, it contributes to its growth.

b. Impact of the scenarios above on the international finance
It is clear from the case study that capital inflows and capital outflows are the two parts of the international capital account. The capital inflow provides loanable funds which are exchanged for financial assets (Mankiw 2011). This indicates that when a country is suffering from national debt or budget deficits, it benefits international finance whereby it allows for financial exchanges. Capital outflow is the direct opposite of this. Read More