Suppose the economy of Bostonia is at full employment. The government of Bostonia raises the tax rate on household interest earnings.

7.What will happen to private savings in Bostonia?

8.Draw a correctly labeled graph of the loanable funds market, and show the effect of the change in private savings identified in Problem 7 on the equilibrium interest rate.

9.Given the real interest rate change identified in Problem 8, answer the following questions.

(a) What is the short-run effect on aggregate demand? Explain.

(b) What is the long-run effect on potential real gross domestic product in Bostonia? Explain.