Question

Using the loanable funds theory, show in a graph how each
of the following events affects the supply and demand for loans and the
equilibrium real interest rate:

a). (0.5 points): A war leads the government to increase spending on the military.
(Assume taxes do not change.). Please note, to get full points, you need to
illustrate (on the proper, well-labeled graph) and explain.

b). (0.5 points): Wars in other countries lead to higher government spending in
those countries. Please note, to get full points, you need to illustrate (on the
proper, well-labeled graph) and explain.

c). (0.5 points): Someone invents a new kind of computer that makes firms more productive. Many firms want to buy the computer. Higher productivity also increases people’s confidence in the economy, so consumers see less need to save.
Please note, to get full points, you need to illustrate (on the proper, well-labeled
graph) and explain.

d). (0.5 points): The same things happen as in part (c). In addition, increased confidence in the economy raises net capital inflows. Please note, to get full points, you need to illustrate (on the proper, well-labeled graph) and explain.

Answer 1