The government is running a budget balance of zero when it decides to increase education spending by $200 billion and finance the spending by selling bonds. The accompanying diagram shows the market for loanable funds before the government sells the bonds. Assume that there are no capital inflows or outflows. How will the equilibrium interest rate and the equilibrium quantity of loanable funds change? Is there any crowding out in the market?

Interest

‘200 400~—600~—~aOD.—3,000 1,200, (Quantity of eanable funds (billions of dlls)

Krugman Wells, Macroeconomics, Se, © 2018 Worth Publishers,