1.[16 points in total] Suppose the government borrows $20 billion more next year than this year.

a.Use a supply-and-demand diagram to analyze this policy. Does the interest rate rise or fall? (4 points)

b.What happens to investment? To private saving? To public saving? To national saving? Compare the size of the changes to the $20 billions of extra government borrowing. (6 points)

c.Suppose households believe that greater government borrowing today implies higher taxes to pay off the government debt in the future. What does this belief do to private saving and the supply of loanable funds today? Does it increase or decrease the effects your discussion in parts (a) and (b)? (6 points)