A small nation in an attempt to boost its economy decides to build a bridge. The bridge costs $70 million to build, which the government needs to borrow. Before the government borrows the money the equilibrium amount of loanable funds in the economy is $350 million and the equilibrium interest rate is 8%. After the government borrows the money the equilibrium amount of loanable funds in the economy is $390 million and the equilibrium interest rate is 12%. Please show on the loanable funds graph the effect of the government taking out the $70 million loan. What happens to AD as a result of the government taking out the loan and why? Please specify what happens to consumption, investment, and government spending.
A small nation in an attempt to boost its economy decides to build a bridge. The bridge costs $70 million to build, which the government needs to borrow. Before the government borrows the money the equilibrium amount of loanable funds in the economy is $350 million and the equilibrium interest rate is 8%. After the government borrows the money the equilibrium amount of loanable funds in the economy is $390 million and the equilibrium interest rate is 12%. Please show on the loanable funds graph the effect of the government taking out the $70 million loan. What happens to AD as a result of the government taking out the loan and why? Please specify what happens to consumption, investment, and government spending.
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