This assignment addresses how the loanable funds market matches savers with borrowers and the impact of various market pressures on interest rates and money availability.

1. Explain how overall national savings relates to overall investment and why savings is always equal to investment.

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2. The following formulas are very important in macroeconomics:

1) Y = C + I + G + EX - IM

2) S = (Y - T - C) + (T - G)

1. Identify the components of each formula.

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1. Explain the relationship between the two formulas.

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3. Explain how changes in interest rates will affect the amount of money that people save.

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4. Explain how changes in interest rates and rates of return on various investment options will affect the amount of money that businesses are willing to invest to increase output.

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5. Explain how government tax revenue and government spending create either a budget surplus or budget deficit. How does that difference affect the market for loanable funds?

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6. Use the market for loanable funds shown in the accompanying diagram to answer the following questions for each of the three scenarios: What will the likely results be on: 1) quantity of money saved, 2) interest rates, and 3) additional business investment. For all scenarios, assume that there are no external controls on interest rates.

D1 S1 - 16% 12% e S 8% 4% S1 D1 O $150 $300 $450 $600 Quantity of Loanable Funds (in millions)