After a report by newspapers that savings was at an all time low, households begin
to save more for retirement,
a. Using a correctly labeled loanable funds graph, show and explain how the
change in savings will impact real interest rates in the United States in the
short-run.
b. Assume the nominal interest rate is currently at 8% and there is no expected
inflation. If the government announced a 3% expected inflation rate,
determine the value of each of the following:
i. new nominal interest rate
ii. new real interest rate
c. Explain how the change in real interest rates identified in part (a) would affect
investment spending by businesses,