Imagine an economy in which there are just three individuals: A, B and C. Each has money to invest and a number of possible investment projects, each of which would require $1,000. A has $2,000 to invest and two projects with returns of 11% and one project with a return of 7%. B has $1,000 to invest and has projects yielding 11% and 7%. C has $1,000 to invest and has projects offering 15% and 12% percent returns.

a. What projects will be undertaken if there is no lending and borrowing?

b. If they do borrow from and lend to each other, what projects will be undertaken and what will the interest rates be?