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Macroeconomics

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Effects of a Disaster on the Loanable Funds Market

MACRO-GRBBBK

Suppose there is a natural disaster or war which destroys a significant portion of the existing capital stock today. What are the effects on the interest rate and the amount of funds that change hands? Ignore any automatic spending and revenue effects due to government tax and spending policies. Also assume a closed economy.

The interest rate

and the quantity of the flow of funds through the market

.