Starting at point A, a reduction in government spending would cause
a. the quantity of loanable funds traded to increase to $125 and the interest rate to rise to 7% (point C).
b. the quantity of loanable funds traded to decrease to $75 and the interest rate to fall to 5% (point B).
c. the quantity of loanable funds traded to increase to $125 and the interest rate to fall to 5% (point D).
d. the quantity of loanable funds traded to decrease to $75 and the interest rate to rise to 7% (point E).
Answer: c. the quantity of loanable funds traded to increase to $125 and the interest rate to fall to 5% (point D).
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