1.Using the loanable funds model and assuming that saving, and hence private consumption, does not depend on the interest rate,demonstratewith a diagram the impact of an increase in government spending on interest rates and investment. Your response to this requirement must contain the diagram of the Loanable Funds Model.

2.Using the graph you developed in requirement 1 above,explainyour results for investment, the interest rate, national saving, and private saving.

3.Assume now that that consumption falls when the interest rate rises, and hence private savings (disposable income minus consumption) rises when the interest rate rises.Demonstratewith a diagram the impact of an increase in government spending on interest rates and investment under this scenario. Your response to this requirement is a second graph of the Loanable Funds Model. (Please do not use the graph created in requirement 1 above as the savings function is different.)

4.Compare results and explain the differences onthe impact of an increase in government spendingfor investment and interest rate, national saving, and private saving under the two alternative assumptions made in requirements 1 and 3. Hint: put the diagrams you developed in requirements 1 and 3 on top of each other, change government expenditure by the same amount under the two scenarios, list the differences, and write up an explanation with a short sentence for each variable.