The first row is interpreted as follows: When the interest rate is 2 percent, I is $20 billion, (G – T) is $3 billion, Sv is $2 billion, and NKIF is $8 billion. Similarly for the other two rows.

1. In the table, complete the row “Demand for Loanable Funds.” __Explain your answer.__

2. In the table, complete the row “Supply of Loanable Funds.” __Explain your answer.__

3. (a) Why is I inversely related to i?

(b) Why is Sv positively related to i?

(c) Why is NKF positively related to i?

4. (a) Why is the equilibrium nominal interest rate 4 percent?

(b) If the nominal interest rate were 2 percent, what would make it increase to 4 percent?

(c) If the nominal interest rate were 6 percent, what would make it decrease to 4 percent?

(d) Why is the real interest rate also 4 percent?

You MUST incorporate a graph in your answers to question 4 (a), (b), (c).

5. Anticipated inflation changes from zero to six percent.

(a) What is the new nominal interest rate? __Explain your answer.__

(b) What happens to the real interest rate? __Explain your answer.__

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