Answer
a) Please see the first graph. The initial amount of loanable funds was $L_{1}$, and after the government borrows the 20 billion dollars, the new amount of loanable funds shrinks to $L_{2}$. The interest rate increases from $i_{1}$ to $i_{2}$.
b) Since the interest rate increases, the levels of investment and national saving decrease. However, private saving increases. Public saving decreases by the amount borrowed (20 billion dollars). Investment and national saving decrease by less than the amount borrowed (20 billion dollars), and private saving increased by less than the amount borrowed (20 billion dollars).
c) Please see the upper two graphs of the second picture. If the supply is elastic, then there is a much smaller change in the interest rate and the loanable funds amount (compared to an inelastic supply curve).
Work Step by Step
d) Please see the lower two graphs of the second picture. If the demand curve is inelastic, then the interest rate will have a large change (and the amount of loanable funds will have a small increase). If the demand curve is elastic, then the interest rate will have a small change (and the amount of loanable funds will have a large change).
e) This change will encourage people to save more (to pay the higher taxes in the future). This will force public saving to decrease (and private saving to increase). In turn, the interest rate will increase, and the amount of loanable funds will also increase (due to the increase in private saving).
