Draw a correctly labeled graph of the loanable funds market for Country X.

a. Illustrate the effect of an increase in foreign purchases of Country X's bonds on the real interest rate.

b. Based on the change in the real interest rate from part a, what will happen to the level of private domestic investment? Explain.

c. Assume Country X's government increases spending without increasing taxes.

I. How can the increase in spending be financed?

II. What will happen to the real interest rate as a result of deficit spending? Explain.