fears about the growth of the U.S. public debt. Using the four-step process for analyzing how changes in supply

and demand affect equilibrium outcomes, how would increased U.S. public debt affect the equilibrium price and

quantity for capital in U.S. financial markets?

Step 1. Draw a diagram showing demand and supply for financial capital that represents the original scenario in

which foreign investors are pouring money into the U.S. economy. Figure 4.6 shows a demand curve, D, and a

supply curve, S, where the supply of capital includes the funds arriving from foreign investors. The original
equilibrium E0 occurs at interest rate R0 and quantity of financial investment Q0.
100 4 • Labor and Financial Markets

FIGURE 4.6 The United States as a Global Borrower Before U.S. Debt Uncertainty The graph shows the demand
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