A Country Initially Has an Equilibrium Real Interest Rate of 4

question 12

Multiple Choice

A country initially has an equilibrium real interest rate of 4 per cent and an equilibrium quantity of investment of $2 trillion. The government's budget deficit then increases. According to the crowding-out effect, the

• A) demand for loanable funds curve shifts rightward, the real interest rate rises and investment decreases.
• B) demand for loanable funds curve shifts rightward, the real interest rate falls and investment increases.
• C) demand for loanable funds curve shifts leftward, the real interest rate falls and investment increases.
• D) supply of loanable funds curve shifts rightward, the real interest rate rises and investment increases.
• E) supply of loanable funds curve shifts leftward, the real interest rate falls and investment decreases.

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Definitions:

Coordination

The organization of different elements of a complex body or activity so as to enable them to work together effectively.

Complacency Trap

A situation where a person or organization becomes overly content with their achievements and stops striving for improvement or growth.

Rigidity

The quality of being unable to bend or be forced out of shape; applied to organizations, it often refers to the inflexibility in rules, procedures, and management.

Flexibility

The capacity to adapt to new, different, or changing requirements and conditions.