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Assume that the loanable funds market for the United States is currently in equilibrium.
a) Draw a correctly labeled graph of the loanable funds market for the United States, and label the equilibrium interest rate as r* and the quantity of funds as QF*.
b) Congress has decided to dramatically cut government spending over the next two years.
i) What will be the impact of the policy action on the government's budget?
ii) On your graph in part (a), show the impact of this policy action on the interest rate and quantity of funds.
c) As a result of the government spending cuts enacted by congress, show the effects of this policy action on a correctly labeled aggregate demand and aggregate supply graph.
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