1. Draw a graph depicting interest rates at the quantity of loanable funds (such as the graph infigure 15.7). Answer the following questions regarding this graph.

a.Explain why the supply of loanable funds is upward sloping.

b.Explain why the demand of loanable funds is downward sloping.

c.If the Federal Reserve sells government bonds, show what will happen to thisgraph. Explain the effects on interest rates and the quantity of loanable funds.

d.If the Federal Reserve lowers the required reserve rate, show what will happen to thisgraph. Explain the effects on interest rates and the quantity of loanable funds.

2. List and explain the logic behind the "four functions of money." Then, consider the following: Inmany prisons, cigarettes are used as money. Do cigarettes in prison have the ability to satisfythese four functions? Explain.

3. For each of the following questions, evaluate whether the statement is "true" or "false". Then,provide a brief explanation to justify your answer.

a. An example of regressive taxing is if John's income increases one year from $20,000 to $30,000, then his income tax due increases from $1,000 to $3,000.

b.If the required reserve rate is 5%, bank runs will be more likely than if the requiredreserve rate is 20%.

c.If the required reserve rate is increased from 10% to 20%, the amount of money insociety will double.

d.If the value of M1 increases and nothing else changes, the value of M2 will also increase.