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After a report by newspapers that savings was at an all time low, households begin to save more for retirement.
a. Using a correctly labeled loanable funds graph, show and explain how the change in savings will impact real interest rates in the United States in the short-run.
b. Assume the nominal interest rate is currently at 8% and there is no expected inflation. If the government announced a 3% expected inflation rate, determine the value of each of the following:
i. new nominal interest rate
ii. new real interest rate
c. Explain how the change in real interest rates identified in part (a) would affect investment spending by businesses.
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