Assume that the loanable funds market in Country X is currently in equilibrium.

Draw a correctly labeled graph of the loanable funds market for Country X, and label the equilibrium interest rate as r* and the quantity of funds as QF*.

Assume that the government of Country X, which had a balanced budget, now increases its spending while holding taxes constant. Assume that the government funds the increase in spending with increased borrowing.

What will be the impact of this policy action on the government’s budget balance?

On your graph in part (a), show the impact of this policy action on the interest rate and quantity of funds.

Given your answer in part (b) (ii), how will private-sector interest-sensitive expenditures be affected?

Given your answer in part (c), what will be the impact on the long-run growth rate of the economy? Explain.