Question: Suppose the loanable funds supplied by private households (SP) is i=2+0.01LF where i is interest rate in percentage term and LF is amount of loanable funds. The demand for loanable funds (DLF) is i=70.01LF

a. Assume the government has a budget surplus of 100. Explain how you can use the information provided to plot the supply of loanable funds (SLF) curve in the graph provided below. Then, plot the demand for loanable funds (DLF) curve in the same graph. Explain how to determine the equilibrium interest rate i* , national savings S*, and investment I*.

b. If a new "pro long-run economic growth" political party has been elected and turns the government budget into a deficit of 100 because of dramatic increases in public employee salaries and benefits. Explain how to determine the new equilibrium interest rate i, national savings S, and investment I.

c. Explain how to determine the size of the crowding-out. Is this political party promoting long-run economic growth for its country? Explain. What government policy may return the loanable funds market back to i*, S*, and I* without affecting the new generous public employee compensation? Explain.