(a) Diagram: A standard supply and demand diagram for the loanable funds market would be drawn. The loanable funds market is typically upward sloping (supply curve) and downward sloping (demand curve). The intersection of these two curves determines the equilibrium interest rate. The X-axis represents the quantity of loanable funds, and the Y-axis represents the interest rate.

(b) Impact of Increased Government Spending: An increase in government spending increases the demand for loanable funds, as the government needs to borrow money to finance its projects. This shifts the demand curve to the right. The new equilibrium interest rate will be higher than the original equilibrium interest rate. The exact magnitude of the increase depends on the shape of the supply and demand curves.

(c) Limitation: One limitation is that the loanable funds theory doesn't account for the potential for government borrowing to crowd out private investment. Increased government borrowing can push up interest rates, making it more expensive for private firms to borrow and invest. This crowding-out effect can offset some or all of the increase in investment that would otherwise occur due to the government spending. The theory also doesn't fully consider the impact of fiscal policy on inflation expectations, which can also influence interest rates.

Factors leading to increased demand for overdrafts:

• Increased consumer spending: Rising inflation and wage growth can lead to higher disposable incomes and increased consumer spending. Overdrafts provide a readily available source of funds to support this spending, even if short-term.
• Changing consumer behaviour: A greater acceptance of short-term debt and a reduced emphasis on saving could contribute to higher overdraft usage. The ease of access to overdrafts encourages this behaviour.
• Economic uncertainty: During periods of economic uncertainty, consumers may be more likely to rely on overdrafts as a safety net for unexpected expenses or income fluctuations.
• Convenience and accessibility: Overdrafts are readily available and easy to access, making them a convenient option for managing short-term cash flow problems. This is particularly true with the rise of digital banking.

Potential Benefits of Overdraft Facilities:

• Consumer convenience: Provides a readily available source of funds for unexpected expenses, avoiding potential disruptions to spending.
• Financial safety net: Acts as a buffer against temporary income shortfalls.
• Facilitates spending: Allows consumers to maintain a certain level of spending even when funds are temporarily unavailable.

Potential Drawbacks of Overdraft Facilities:

• High interest rates: Overdrafts typically carry high interest rates, making them an expensive form of borrowing.
• Debt trap: The high cost of overdrafts can lead to a debt trap, where consumers struggle to repay the balance and accumulate further interest charges.
• Encourages irresponsible spending: Easy access to credit can encourage overspending and poor financial management.
• Potential for financial distress: Reliance on overdrafts can exacerbate financial difficulties during periods of economic hardship.

Assessment: While overdrafts offer convenience and a safety net, the high cost of borrowing and the potential for debt accumulation mean that consumers must exercise caution. Regulation by the Bank of England is important to ensure fair lending practices and prevent exploitation.

Definition of Money Supply: The money supply refers to the total amount of money circulating in an economy at a given time. It's a crucial macroeconomic indicator as it influences inflation, economic growth, and interest rates.

Different Measures of the Money Supply:

• M0 (Monetary Base): This is the most narrow measure and includes physical currency in circulation (notes and coins) plus commercial banks' reserves held at the central bank. It represents the foundation of the money supply.
• M1: This includes M0 plus demand deposits (checking accounts) and other checkable deposits. It represents money that is readily available for spending.
• M2: This includes M1 plus savings deposits, money market deposit accounts, and other less liquid assets. It represents money that is less readily available but still easily convertible to cash.

Why Different Measures are Used:

• M0 is used to track the immediate liquidity in the economy and the central bank's control over the money supply. Changes in M0 often precede changes in the broader money supply.
• M1 is used to gauge the immediate spending potential of the economy. It's a good indicator of how quickly money can be spent.
• M2 provides a broader picture of the money available for spending and investment. It's often used as a more comprehensive measure of liquidity and economic activity. Policymakers often monitor M2 to assess overall economic conditions.