Using the National Income Account, and graphing the market for loanable funds, answer the following questions:
(a) Draw the Demand and Supply curve for loanable funds such that the equilibrium interest rate is 3% and the equilibrium quantity of loanable funds is $10 trillion. Describe the type of interest rate used in this model.
(b) Suppose now that the government is concerned with the way the economy is working – more specifically, the current high unemployment rates require higher growing rates in the near future – and decides to introduce a tax break in future investment-taxes equal to the 30% of the investment done in the next 6 months [use only the effect on investment and not on taxes]. Explain how this new policy would affect the equilibrium in (a).
(c) Now suppose that current government spending falls from $25 trillion to $18 trillion. How will this change affect the equilibrium in (a).
(d) Assume now that both changes in (b) and (c) occur at the same time. What will happen with the equilibrium interest rate and equilibrium quantity of loanable funds in (a).