4. Review Chapter 4 & Module 2: Loanable Funds Theory (see lecture notes).

a. Explain the loanable funds theory in your own words (fine to show graphs along with your explanation if youd like). Be sure to explain the shape of the demand & supply curves for LFs, the net demanders and suppliers of funds, and the factors that affect the respective demand and supply for loanable funds.

b. If the Federal Reserve decided to reduce the money supply by engaging in open market bond sales to the non-bank public, explain what will happen to the equilibrium interest rate in the U.S. based on the Loanable Funds Theory (In your discussion mention or show with a graph any change in the demand or supply curves for loanable funds and the effect on the real equilibrium interest rate).

c. Using the loanable funds theory, explain what will happen to the real equilibrium interest rates if investors/savers become more risk adverse (in your discussion mention or show with a graph the change in the demand or supply curves for loanable funds and the effect on the real equilibrium interest rate).

d. Using the loanable funds theory and the demand and supply of loanable funds, explain what will happen to the real interest rate if a new technology is developed, and the demand for loans by businesses to finance projects to utilize this technology increases (in your discussion mention or show with a graph the change in the demand or supply curve for loanable funds and the effect on the real equilibrium interest rate).