Essentials of Economics 7th Edition by Gregory Mankiw

Exercise 16

In the summer of 2010, Congress passed a far-reaching financial reform to prevent another financial crisis like the one experienced in 20)8-2009. Consider the following possibilities:
a. Suppose that, by requiring firms to comply with strict regulations, the bill increases the costs of investment. On a well-labeled graph, show the consequences of the bill on the market for loanable funds. Be sure to specify changes in the equilibrium interest rate and level of saving and investment. What are the effects of the bill or long-run economic growth?
b. Suppose, on the other hand, that by effectively regulating the financial system, the bill increases savers' confidence in the financial system. Show the consequences of the policy in this situation on a new graph, again noting changes in the equilibrium interest rate and level cf saving and investment. Again evaluate the effects on long-run growth.