Suppose the government runs a $50 billion more budget surplus this year than the last year.

1. Use a supply-and-demand diagram to analyze this change. Does the interest rate rise or fall? Why?
2. What happens to investment? To private saving? Compare the size of the changes to the $50 billion of extra government surplus.
3. How does the elasticity of supply of loanable funds affect the size of these changes? Briefly explain why. Use both words and graphs in your explanation.
4. How does the elasticity of demand for loanable funds affect the size of these changes? Briefly explain why. Use both words and graphs in your explanation.