3.Consider the below demand and supply schedules for a loanable funds market. For all the below questions, assume this is a small open economy with perfect capital mobility.

Interest rate Domestic LF supply Domestic LF demand International LF supply

0% 20 200 0

1% 30 180 0

2% 40 160 0

3% 50 140 100

4% 60 120 200

5% 70 100 300

6% 80 80 400

7% 90 60 500

8% 100 40 600

9% 110 20 700

a.Use the first three columns to draw the graph and indicate the equilibrium domestic interest rate and level of investment and savings. (For the moment you can ignore the last column.)

b.If the world interest rate is 3% and there is no risk premium, then what is the level of domestic savings, domestic investment, and the capital account?

c.Now consider the 4^thcolumn, showing the international supply of capital, which requires a risk premium for international borrowing above $100. How does this change the answer to question (3b) above?

d.Consider what would happen if the demand for loanable funds doubled. How would that change the level of domestic savings, domestic investment, the capital account, and the interest rate?