Interest Rate Investment 0% $100 2 92 4 78 6 61 8 45 Refer to the accompanying i
ID: 1155577 • Letter: I
Question
Interest Rate
Investment
0%
$100
2
92
4
78
6
61
8
45
Refer to the accompanying investment schedule. Investment spending is in billions of dollars. Assume that private investment spending is initially $78 billion. If the government finances a deficit and this action increases the interest rate by 2 percentage points, then the government financing will have potentially crowded out
1. 92 billion of investment spending.
2. $78 billion of investment spending.
3. $17 billion of investment spending.
4. $14 billion of investment spending.
Interest Rate
Investment
0%
$100
2
92
4
78
6
61
8
45
Explanation / Answer
Initially when investment spending was $78 billion, corresponding interest rate was 4?. If interest rate increases by 2 percentage points from 4? to 6?, the investment decreases from $78 billion to $61 billion. It means government financing has crowded out $(78 - 61) billion = $ 17 billion of investment spending.
Answer- option 3
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