Question 1 & 3

Solve those questions with specific solutions and each steps.

1. Suppose the market for loanable funds is in equilibrium. Assume now that the gov- ernment increases its expenditures and that it finances them with an equal increase in taxes. (a) Assuming that consumption depends not only on disposable income but also on the interest rate (negatively), explain how the government policy above affects the interest rate and the quantity of funds loaned. (Assume, of course, that MPC