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Equilibrium in the loanable funds and goods markets, pt. 2: Again, suppose that the economy begins...

Equilibrium in the loanable funds and goods markets, pt. 2: Again, suppose that the economy begins in equilibrium in the loanable funds and goods market. Now suppose that businesses become more pessimistic about the economy and decide that they want to invest less at every real interest rate r. According to the Classical model:

a) How do the supply and demand for loanable funds in the loanable funds market shift? Draw a diagram to show what happens to interest rates and investment in the new equilibrium.

b) How do the supply and demand for goods in the goods market shift? Draw a diagram to show what happens to the interest rate and output in equilibrium.

c) In the new equilibrium, what has happened to government purchases G? To output Y? To taxes T? To consumption C? To investment I?

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