When the government runs a budget surplus (T > G), it deposits any unspent tax revenue into the banking system, thus adding to the supply of loanable funds. In this case, the supply of loanable funds is household saving plus the budget surplus [S + (T - G)], while the demand for funds is just planned investment (I^p).
a. Draw a diagram of the loanable funds market with a budget surplus, showing the equilibrium interest rate and quantity of funds demanded and supplied.
b. Prove that when the loanable funds market is in equilibrium, total leakages (S + T) are equal to total injections (I^p+ G).

c. Show (on your graph) what happens when government purchases increase, identifying any decrease in consumption and planned investment on the graph (similar to what was done in the following figure).
d. When the government is running a budget surplus, does an increase in government purchases cause complete crowding out? Explain briefly.

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Interest Total Supply of Funds (Saving) Rate в 7% 5% AH = Gt P + G2 -T Trillions of 1.75 2.05 2.25 Dollars per Year