As the US baby boomers retire, US government budget deficits are projected to increase significantly.
a. Explain intuitively why the supply curve in the US loanable funds market slopes upward. Begin your explanation, by considering an increase in the real interest rate.
b. Using the three panel diagram for the US, explain the effects of the increased budget deficits on the US economy. Determine what happens to the following: the real interest rate, national savings, investment, NCO, E, exports, imports, and net exports. [Note: If you cannot unambiguously determine what happens to any of the variables listed, clearly state that the effect is ambiguous, and discuss under what conditions the variable increases or decreases.]