Suppose that the government plans to undertake one of two possible spending proj

Question

Suppose that the government plans to undertake one of two possible spending
projects: Project A involves spending $10 billion to build more military aircraft;
project B involves spending the same amount to improve local bridges and water
systems. Project A has no effect on investment, but project B improves the
profitably of businesses by lowering their costs for transportation and water. Show
how this difference leads to a different real interest rate, depending on which
project is chosen and assuming a closed economy. Do you think this result is
generally true? In which case is the economy better off?

Explanation / Answer

Project A involves spending $10 billion to build more military aircraft . Here the metal industries and other industries who are related to this field are profited. But it does not benefit the economy in the long run. Project A has no effect on investment. Hence the interest rates are different from that of Project B nvolves spending the same amount to improve local bridges and water system . this is more profitable in the long run. Economy is better when Project B is chosen !!!

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