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:

Biodiversity

The variety of plant and animal life in the world or in a particular habitat, considered important for maintaining ecological balance.

Trees

Perennial plants with an elongated stem, or trunk, supporting branches and leaves in most species.

Erosion

Erosion is the process by which natural forces like water, wind, or ice wear away land surfaces, transporting the materials from one location to another.

Pollutants

substances that pollute something, especially water or the atmosphere, and can cause harm to the environment and health.