Saving, Investment, and the Financial System - End ofInterestrateChapter Problems24%225. The government is running a budget balance of zerowhen it decides to increase education spending by $200201816billion and finance the spending by selling bonds. The14accompanying diagram shows the market for loanablefunds before the government sells the bonds. Assume thatthere are no capital inflows or outflows. As a result of the121086increase in education spending, the equilibrium interest rate2Dby$2001,200percentage points, and the4006008001,000Quantity of loanable funds (billions of dollars)equilibrium quantity of loanable fundsbybillion dollars. Thisan exampleof crowding out.

Question
Asked Oct 20, 2019
Saving, Investment, and the Financial System - End of
Interest
rate
Chapter Problems
24%
22
5. The government is running a budget balance of zero
when it decides to increase education spending by $200
20
18
16
billion and finance the spending by selling bonds. The
14
accompanying diagram shows the market for loanable
funds before the government sells the bonds. Assume that
there are no capital inflows or outflows. As a result of the
12
10
8
6
increase in education spending, the equilibrium interest rate
2
D
by
$200
1,200
percentage points, and the
400
600
800
1,000
Quantity of loanable funds (billions of dollars)
equilibrium quantity of loanable funds
by
billion dollars. This
an example
of crowding out.
help_outline

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Saving, Investment, and the Financial System - End of Interest rate Chapter Problems 24% 22 5. The government is running a budget balance of zero when it decides to increase education spending by $200 20 18 16 billion and finance the spending by selling bonds. The 14 accompanying diagram shows the market for loanable funds before the government sells the bonds. Assume that there are no capital inflows or outflows. As a result of the 12 10 8 6 increase in education spending, the equilibrium interest rate 2 D by $200 1,200 percentage points, and the 400 600 800 1,000 Quantity of loanable funds (billions of dollars) equilibrium quantity of loanable funds by billion dollars. This an example of crowding out.

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Expert Answer

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The increase in government spending by $ 200 B increase the demand for loanable funds...

Interest
rate
24%
22
20
18
16
14
E2
12
10
6
4
D1
2
D
$200
400
600
800
1,000
1,200
Quantity of loanable funds (billions of dollars)
CO O
2
help_outline

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Interest rate 24% 22 20 18 16 14 E2 12 10 6 4 D1 2 D $200 400 600 800 1,000 1,200 Quantity of loanable funds (billions of dollars) CO O 2

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