Graph walkthrough · Macro · Loanable funds market

A budget surplus lowers rates

Tax revenue outruns spending and the government runs a surplus.

Step 1 of 3 · Before the surplus

The horizontal axis is the quantity of loanable funds. The vertical axis is the real interest rate. The market is at E₀.

The chain in words

Step 1
Before the surplus
The horizontal axis is the quantity of loanable funds. The vertical axis is the real interest rate. The market is at E₀.
Step 2
Supply of funds shifts right
A surplus is public saving. The government pays down debt, returning funds to lenders who now have more to offer at every interest rate. The supply of loanable funds shifts right. At the old rate, funds offered exceed funds wanted.
Step 3
The real interest rate falls
The real interest rate falls, more private projects become worthwhile, and the market settles at E₁: a lower rate and more private investment. This is crowding out in reverse.

Takeaway. A budget surplus adds to national saving, shifts the supply of loanable funds right, and lowers the real interest rate.

Draw it yourself

This shock: draw the graph The government runs a deficit Households save more An investment tax credit

More on the loanable funds market graph

A deficit crowds out investment A saving boom lowers rates An investment tax credit Foreign capital flows in

Go deeper

Lesson: Limits of Fiscal Policy

The walkthrough shows the chain. The lesson explains why each link holds, with worked examples and practice questions that remember what you get wrong.

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