The Table Below Gives Data on Interest Rates and Investment

question 11

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:

European Works Council

A body representing European employees, established to provide information and consultation rights on transnational matters affecting workers in the European Union.

Collective Bargain

A method of discussion between employers and employee representatives aimed at achieving mutual agreements to govern work environments.

NAALC

The North American Agreement on Labor Cooperation, a supplement to the North American Free Trade Agreement (NAFTA) focusing on labor law enforcement.

Labor

Refers to human work, especially physical work done in exchange for wages.