Assignment Objective- Using the "Loanable Funds Model," evaluate the effects of government borrowing under two scenarios.The first scenario assumes that private savings (and hence consumption)does notdepend on the interest rate.In this scenario, the Savings function in the Loanable Funds Model is vertical.The second scenario assumes that private savingsdoesdepend on the interest rate, i.e. consumers will save a larger portion of their disposable income as interest rates rise.Under scenario 2, the Savings function in the Loanable Funds Model is upward sloping.

Resources- Textbook Figure 3.11 and its discussion (End of Chapter 3, Section 4).

Requirements

1.Using the loanable funds model and assuming that saving, and hence private consumption, does not depend on the interest rate,demonstratewith a diagram the impact of an increase in government spending on interest rates and investment. Your response to this requirement must contain the diagram of the Loanable Funds Model.

2.Using the graph you developed in requirement 1 above,explainyour results for investment, the interest rate, national saving, and private saving.