The following graph shows the demand for loanable funds and the supply of loanable funds in the United States. At the current equilibrium, the government is experiencing a balanced budget. Assume that the automobile industry is on the verge of bankruptcy and the U.S. government decides to implement a several-billion-dollar bailout plan without a rise in taxes, causing a budget deficit.
1. Show the effect of the budget deficit on the market for loanable funds by shifting the demand (D) curve, the supply (S) curve, or both. (Please use the image attached)
2. Based on this model, the budget deficit leads to an increase? a decrease? in the level of investment and an increase? a decrease? in the interest rate.
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