Principles of Economics 2e
2nd Edition
ISBN: 9781947172364
Author: Steven A. Greenlaw; David Shapiro
Publisher: OpenStax
Textbook Question
Chapter 31, Problem 29P

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.

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Collaboration with Congress during the Clinton administration allowed for an aggressive deficit‑cutting plan to pass. At the end of the 1990s, Congress eliminated the government deficit. Manipulate the graph to illustrate how the elimination of the deficit affects the loanable funds market. look at image for graph  What does the model predict will happen to the quantity of private investment as a result of elimination of the government deficit? Private investment will increase because the cost of borrowing increases. decrease because the cost of borrowing increases. decrease because the cost of borrowing decreases. increase because the cost of borrowing decreases.
The table sets out the data for an economy when the government's budget is balanced. The quantity of loanable funds demanded increases by \$1.5 billion at each real interest rate and the quantity of loanable funds supplied increases by \$0.5 billion at each interest rate If, at the same time the government budget becomes a deficit of \$1.0 billion, what are the real interest rate and investment? Does any crowding out occur? >>> Answer to 1 decimal place The real interest rate is Investment is \$ billion. There OA. is, HI percent a year crowding out in this situation because OB. is no the deficit increases the real interest rate, which decreases investment investment is \$7.0 billion Real interest rate (percent per year) 4 5 6 7 8 9 10 Loanable funds Loanable funds demanded supplied (billions of 2007 dollars) 8.0 7.5 7.0 6.5 6.0 5.5 5.0 5.0 5.5 6.0 6.5 7.0 7.5 8.0
How does the government budget deficit impact interest rates, investment, and economic growth?  Explain your answer.
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