Draw the graph · Macro · Loanable funds market
The government runs a surplus
Drag a curve sideways, or use its arrows. A curve you do not move is a curve you are saying stays put. Make each shift clear enough that a reader could see it.
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Demand for loanable funds stays put. Supply of loanable funds shifts right.
A budget surplus is public saving. It adds to the funds available at every real interest rate, so the supply of loanable funds shifts right. Demand is unchanged. The lower interest rate moves borrowers down along their demand curve.
The real interest rate falls and more funds are borrowed.
Common mistake. Students often shift demand left because 'the government borrows less.' On the standard diagram, a surplus is public saving, and saving is supply. Shift the supply curve right.
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