In the summer of 2010, Congress passed a far-reaching nancial reform to prevent another nancial crisis like the one experienced in 2008-2009. Consider the following possibilities:
(a) Suppose that, by requiring rms to comply with strict regulations, the bill increases the cost of investment. On a well-labeled graph, show the consequences of the bill on the market of loanable funds. Be sure to specify changes in the equilibrium interest rate and level of saving and investment. What are the eects of the bill on long-run economic growth.
(b) Suppose, on the other hand, that by eectively regulating the nancial system, the bill increases savers' condence in the nancial system. Show the consequences of the policy on this situation on a new graph, again noting changes in the equilibrium interest rate and level of saving and investment. Again evaluate the effects on long-run growth.