Real interest Loanable funds Loanable funds

rate( percent demanded supplied

per year) (Trilions of dollars 2005) ( Trilions of dollars 2005)

4 8.5 5.5

5 8 6

6 7.5 6.5

7 7 7

8 6.5 7.5

9 6 8

10 5.5 8.5

1. If the government budget is balanced, what are the real interest rate, the quantity of loanable funds, investment, and private saving? Does any crowding out occur?
2. If the government budget becomes a deficit of $1 trillion, what are the real interest rate, the quantity of loanable funds, investment, and private saving? Does any crowding out occur?
3. Suppose that the government has a budget surplus of $1 trillion. What are the real interest rate, the quantity of investment, and the quantity of private saving? Is there any crowding out in this situation?
4. If the government wants to stimulate investment and increase it to $9 trillion, what must it do?