5. In Figure 5(b), we assumed that when savings rise, none of the additional savings enter a loanable funds market. Suppose, instead, that 40 percent of any additional savings is supplied to financial intermediaries, while the rest goes into safes and mattresses. Also, assume that 30 cents out of every dollar provided to a financial intermediary is lent out. If there is no other deviation from the normal functioning of the loanable funds market, determine the impact of a $100 billion increase in annual savings on (a) planned investment per year and (b) total spending per year.

FIGURE 5 Two Destinations for Additional Household Saving (a) Consumption Falls, Planned Investment Rises => Total Spending Unchanged Consumption Spending $100 Billion Saving $100 Billion +$100 Loanable Funds +$100 Billion Market Billion Planned Investment Spending Consumption Spending (b) Consumption Falls, Planned Investment Unchanged => Total Spending Falls No Change $100 $100 + $0 Loanable Funds +50 in Planned Billion Saving Billion Market Investment Spending +$100 Billion Safes and Mattresses In panel (a), the loanable funds market behaves according to the classical model. Households cut their spending (incre saving) by $100 billion per year, and supply it all to the loanable funds market. The funds are loaned out to business fi planned investment rises by $100 billion. Consumption falls by $100 billion and planned investment rises by $100 bil there is no change in total spending. Panel (b) deviates from the classical model. As in panel (a), households cut their spending (increase their saving) by billion per year, but now they supply none of it to the loanable funds market. The additional saving is not loaned out 1 firms, and planned investment does not change. Consumption falls by $100 billion and planned investment does not a total spending drops by $100 billion