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Temporary Productivity Shock Effects on the Loanable Funds Market


Suppose there is a one-time-only increase in productivity that was entirely unexpected. It lasts for the current period only and then productivity returns to its expected level in all future periods. 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