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Macroeconomics

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The Loanable Funds Market: Budget Surpluses and Deficits

MACRO-BIZ5Q5

Consider the figure below which shows the budget deficit function for the country of Northmanni:

G denotes government spending and T denotes net tax revenues. Suppose in Year 1, this country’s government budget was initially characterized by Point A. In the following year, the country experienced a significant financial crisis and the country’s budget situation was characterized by Point B. Fill in the blanks in the following paragraph based on the figure and series of events just mentioned.

In Year 1, Northmanni had a budget

of $\$30$ billion. As a result of the financial crisis, the government now has a budget

of

. To accommodate its spending requirements in Year 2, the government would have entered the loanable funds market in search of

if any prior surpluses were available to offset increases in spending. This action would have

.