GDP = 10

Consumption = 7

Government Spending = 2

Private Savings = 1

Transfer Payments = 1

A) Calculate Taxes, Investment, Public Savings and National Savings

B) Draw the graph of the market for loanable funds, assuming the equilibrium

interest rate i* = 3%

Make sure to label the axis and equilibrium points

C) If G increases so that now G = 2.5, recalculate Public Savings, National Savings and

Investment. (assume that any other variables stay the same)

D) Show the change on your graph. What happens to i* and Q*?

E) Use a production function to show the affects of the change from A to C and explain the impact on long run growth.