Country X is currently maximizing its resources and employment to produce consumer goods and capital goods. The government has a balanced budget.

(a) Illustrate the economy of Country X on a fully labeled production possibilities curve, assuming increasing opportunity cost. Label a point where the economy is currently operating as point X.

(b) The government of Country X reduces the tax rates for interest earned on household savings. Would the national savings decrease, increase, or stay the same? Explain.

(c) On a fully labeled loanable funds market graph, illustrate the impact of the policy from part (b) on the equilibrium real interest rate and the equilibrium quantity of funds.

(d) Assume that Country X is still maximizing resource use. On your PPC graph from part (a), illustrate the short-run impact of the change in real interest rates. Illustrate a new production point as point R.

(e) In the long run, will the long-run aggregate supply of Country X decrease, increase, or stay the same? Explain.

Country Y

(f) Country Y has a real GDP per capita of $75, and it has a population of 2 million. Calculate Country Y's real GDP.

(g) Four years later, the GDP per capita of Country Y is $90. Assume there has been no technological advancement and no increase in physical capital in that time period. Identify a policy that could lead to this increase.

(h) Calculate the economic growth rate for Country Y over the time period described in part (g). Show your work.