An economy is currently in a recession.

(a) Assume the government budget is balanced. In the absence of any discretionary policy action, will the government budget move into surplus, deficit, or remain in balance? Explain.

(b) Now assume instead the government increases spending without changing taxes to close the recessionary gap. What effect will this policy have on the national debt?

(c) Draw a correctly labeled graph of the loanable funds market and show the effect of the change in the national debt on the equilibrium real interest rate.

(d) Based on the change in the equilibrium real interest rate identified in part (c), what will happen to economic growth in the country in the long run? Explain.