Use the market for loanable funds shown in the accompanying diagram to explain what happens to private savings, private investment spending, and the interest rate if each of the following events occur. Assume that there are no capital inflows or outflows.

a. The government reduces the size of its deficit to zero.

b. At any given interest rate, consumers decide to save more. Assume the budget balance is zero.

c. At any given interest rate, businesses become very optimistic about the future profitability of investment spending. Assume the budget balance is zero.

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Interest rate Q1 Quantity of loanable funds