1. suppose the government of Wunderbar wants to finance a $1 million increase in
ID: 1202571 • Letter: 1
Question
1. suppose the government of Wunderbar wants to finance a $1 million increase in government spending by selling bonds. According to the theory by David Ricardo, the public will______(spend less today/spend more today/notbuy bonds) beacause they'll recognize that the government will have to_____(lower taxes/ raise taxes/default on the bonds) in the future to pay back the bonds.
Imagine the government decides to finance a $1 million increase in government spending by selling bonds. As the government demands more and more what are called loanable funds (that is, the funds available to be loaned and borrowed), the interest rate they offer on government bonds must them to induce more and more people to buy This means the cost of repaying the bonds will to raise investment funds by selling bonds of their own , such that fewer corporations will find it profitable fewer Consider the investment demand (ID) curve on the following graph REAL INTEREST RATE (Percent) 10 500 520 540 560 580 600 INVESTMENT (Billions of dollars] Initially, the interest rate is 3% and the quantity of investment demanded is $570 billion. Suppose an increase in the public debt causes the interest rate to rise from 3% to 7%. The increase in the public debt crowds out of private investment. (Assume that the increase in the public debt does not affect the position of the investment demand curve.) Consider two identical economies, economy A and economy B, both of which are producing close to their full employment output levels. The governments in economies A and B both increase the size of their national debts by the same amount. The government in economy A takes on the additional debt to provide free concerts and firework displays for its citizens. The government in economy B takes on the additional debt in order to improve its mass transit systems. The crowding-out effect of the increase in public debt will cause the future capital stock in economy A to fall by a amount than the future capital stock in economy BExplanation / Answer
Answer:
1) Suppose the government of Wunderbar wants to finance a $1 million increase in government spending by selling bonds. According to the theory by David Ricardo, the public will spend more today because they'll recognize that the government will have to lower taxes in the future to pay back the bonds.
2) Imagine government decides to finance a $1 million increase in government spending by selling bonds. As the government demands more and more what are called loadable funds, the interest rate they offer on government bonds must rise to induce more and people to buy them.
This means the cost of repaying the bonds will fall, such fewer corporations will find it profitable to raise investment funds by selling bonds of their own.
3) Initially, the interest rate is 3% and the quantity of investment demanded is $570 billion. Suppose an increase in the public debt causes the interest rate to rise from 3% to 7%. The increase in the public debt crowds out $20billion of private investment.
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