The Table Below Gives Data on Interest Rates and Investment

question 32

Essay

The table below gives data on interest rates and investment demand in a hypothetical economy.Figures are in billions. (a) Use the I_d1 schedule.Assume that the government needs to finance a budget deficit and this public borrowing increases the interest rate from 5% to 6%.How much crowding-out of private investment will occur?
(b) Now assume that the deficit is used to improve the performance of the economy, and that as a consequence the investment-demand schedule changes from I_d1 to I_d2.At the same time, the interest rate rises from 5% to 6% as the government borrows money to finance the deficit.How much crowding-out of private investment will occur in this case?
(c) Graph the two investment-demand schedules on the graph below and show the difference between the two events.Put the interest rate on the vertical axis and the quantity of investment demanded on the horizontal axis.

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Definitions:

Oppositional Defiant Disorder

Syndrome of chronic misbehavior in childhood marked by belligerence, irritability, and defiance, although not to the extent found in a diagnosis of conduct disorder.

Conduct Disorder

A mental disorder diagnosed in childhood or adolescence characterized by a persistent pattern of behavior that violates social norms and the rights of others.

Serious Violations of Rules

Behaviors that significantly depart from societal norms or regulations, often resulting in legal or disciplinary consequences.

DSM-5 Criterion

Specific guidelines outlined in the Diagnostic and Statistical Manual of Mental Disorders, Fifth Edition, used to diagnose psychiatric disorders.