We are dealing with the loanable funds market of an economy (slide 40, chapter 3). Assume that the savings function is upward sloping (as in slide 49, chapter 3). In each of the following cases, what will happen to equilibrium interest rate and equilibrium investment? Your answer must be supported by a diagram. Unsupported answer will be given zero.
a) People are predicting a war and they are now saving more than before.
b) Government decides a tax cut for the people.
c) Government has changed tax law that provides less incentive for investment.