10. The following table presents the data for an economy when the government's budget is balanced.

Real interest rate

(percent per year) Loanable funds demanded(billions of 2007 dollars) Loanable funds supplied (billions of 2007 dollars)

2 9.0 3.0

3 8.0 4.0

4 7.0 5.0

5 6.0 6.0

6 5.0 7.0

7 4.0 8.0

8 3.0 9.0

9 2.0 10.0

10 1.0 11.0

a. What is a balanced budget, and why does it matter?

(2 marks)

b. Calculate the equilibrium real interest rate, investment, and private saving. Why is this interest rate referred to as equilibrium?

(2 marks)

c. If planned saving decreases by $1 billion at each real interest rate, explain the change in the real interest rate and investment.

(2 marks)

d. If planned investment increases by $1 billion at each real interest rate, explain the change in saving and the real interest rate.

(2 marks)

e. If both planned savings and planned investment increase by $1 billion at each real interest rate, explain the change in the real interest rate and equilibrium quantity of loanable funds. Sketch your answer using the diagram of the model for the loanable funds market.

(2 marks)