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A-Level Economics · Loanable funds (crowding out) diagram question
What shifts the DEMAND for loanable funds right from D₁ to D₂?
The diagram
The answer
The government borrowing heavily to fund a budget deficit. The government is a borrower like any other — a huge one. During Covid it borrowed £400 billion, around 20% of the economy. The interest rate is just the price in a market for loans: savers supply the funds, borrowers demand them. When the government borrows to fund a deficit, a colossal extra customer turns up wanting funds, so DEMAND shifts right from D₁ to D₂. A change in the interest rate itself would only move you along a curve.
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