Suppose that the investment demand curve in a certain economy is such that inves

Question

Suppose that the investment demand curve in a certain economy is such that investment declines by $100 billion for every 1 percentage point increase in the real interest rate Also, suppose that the investment demand curve shifts rightward by $170 billion at each real interest rate for every 1 percentage point increase in the expected rate of return from investment. If stimulus spending (an expansionary fiscal policy) by government increases the real interest rate by 2 percentage points, but also raises the expected rate of return on investment by 1 percentage point, how much investment, if any. will be crowded out? Instructions: Enter your answer as a whole number.

Explanation / Answer

Interest rate increase will reduce investment by $200 billion (= 2 x $100 billion),

At increased rate of return, the investment will go up by 170 billion (= 1 x $170 billion),

The overall effect will be 200-170 = 30 billion, this is the amount that will be crowded out.

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