Assume that consumption is a function of disposable income alone: C = C(Y-T). Modify the consumption function to make consumption depend on both after-tax income and the real interest rate. Explain why you think this might make sense.

In the question above, consider a drop in the world real interest rates (due to a decline in global demand for loans associated with the bursting of the Dot Com Bubble).

• Explain the impact on real Savings and Investment in the economy.
• How does this results differ if consumption does not depend on the real interest rate?
• Assuming no change in the rate of growth of money in the economy, will the nominal interest rate change when the world real interest rate declines?