1. The loanable funds market in an economy is in equilibrium.

a)Draw a correctly labeled graph of the loanable funds market, labeling the equilibrium real interest rate and the equilibrium quantity.

b)Show the impact of a decrease in the money supply for this economy in your graph from part (a).

c)Will the result be a shortage or surplus in the loanable funds market at the original equilibrium?

d)Will lenders of existing fixed-rate loans be better or worse off as a result of the change in the real interest rate?

e)How will investment spending on facilities and equipment in this economy be impacted? Explain.

2. Assume that an economy is in a short-run macroeconomic equilibrium and experiences a negative demand shock.

a)What will happen to real output and the price level as a result? Explain.

b)Using a correctly labeled graph of the money market, illustrate the impact of the negative demand shock.

c)What will happen to the price of previously issued bonds? Explain.

d)What is one policy action that the central bank could take to offset the change in the nominal interest rate from part (b)?

e)Assume that the required reserve ratio is 10 percent. If the central bank wants to increase the money supply by $20 billion, what is the specific open-market operation (type of operation and minimum value) that the central bank needs to conduct?