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Principles of Economics 2e

2nd Edition
Steven A. Greenlaw; David Shapiro
ISBN: 9781947172364

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BuyFindarrow_forward

Principles of Economics 2e

2nd Edition
Steven A. Greenlaw; David Shapiro
ISBN: 9781947172364
Textbook Problem

During the most recent recession, some economists argued that the change in the interest rates that comes about due to deficit spending implied in the demand and supply of financial capital graph would not occur. A simple reason was that the government was stepping in to invest when private firms were not. Using a graph, explain how the use by government in investment offsets the deficit demand.

To determine

To discuss: The investment offsets in deficit demand used by government with the help of graphs.

Explanation

When there is the reduction in the private investment, it leads to fall in the demand for capital and hence, the curve shifts to the left. Now, these leftward shifts would be remunerated by the rise in the government spending which further leads to rightward shift back again. Diagrammatically, it can be shown as done below:

Initially, the horizontal axis shows the quantity of financial capital and vertical axis shows the interest rate. The equilibrium appears at the intersection of money supplied and demanded at E0...

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