Suppose that consumption depends on the interest rate. How might this alter the conclusions reached in the chapter about the impact of an increase in government purchases on investment, national saving, and the interest rate?

a.Assume that the government borrows $4 billion to pay for its increased purchases. Adjust the graph below to reflect this change. Be sure to indicate the new market equilibrium.

Market for Loanable Funds 10 CO National saving, S(r) 6 E Interest Rate (percent) 5 4 Investment, I(r) 2 0 2 4 6 8 10 12 14 16 18 20 Loanable Funds (in billions of dollars)