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.

---

Definitions:

Smooth

Pertaining to smooth muscle, an involuntary non-striated muscle found within the walls of organs and structures such as the digestive tract, blood vessels, and urinary bladder.

Cardiac

Pertaining to the heart and its functions or diseases.

Skeletal

Relating to the skeleton, the bony framework of the body that protects internal organs and supports the body structure.

Accomplishments

Achievements or successes that have been completed or attained, often through effort or skill.