Assume there is an increase in government spending of $30 million and a decrease in tax revenue by $45 million. Carefully answer the following and demonstrate your answers using a diagram.
What effect will this have on the demand and supply of loanable funds? How will this affect the real interest rate and the quantity of investment?
Is the equilibrium change the same, more, or less than the initial movement of the curve you identified in part a.? Carefully explain why, using your diagram.
How will your answer in part a. change if the decrease in tax revenue was $15 million instead of $45 million? Carefully explain using a diagram (you can use the same one as before but need to clearly indicate the change related to this part and describe it in words).