Explain and show graphically how government deficits can "crowd out" private investment
What will be an ideal response?
When the government runs a deficit, public saving falls, reducing the supply of loanable funds and shifting the supply curve for loanable funds to the left, as shown below. The decrease in the supply of loanable funds results in an increase in the equilibrium interest rate and a decrease in the equilibrium quantity of loanable funds, moving from point A to point B below. As the equilibrium interest rate rises, the quantity of loanable funds demanded by firms for investments in capital decreases. Increased government deficits raise interest rates, thereby "crowding out" private investment by firms.
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The major problem facing the economy is high unemployment and weak economic growth. The inflation rate is low and stable. Therefore, the Federal Reserve decides to pursue a policy to increase the rate of economic growth. Which policy changes by the Fed would reinforce each other to achieve that objective?
A. Buying government securities and raising the reserve requirement. B. Selling government securities and raising the discount rate. C. Buying government securities and lowering the discount rate. D. Selling government securities and lowering the discount rate.
The fact that 10 additional nations joined the European Union in May 2004 is an example of deepening
Indicate whether the statement is true or false
Suppose the economy is producing at the natural rate of output. An increase in consumer and business confidence will cause ________ in real GDP in the long run and ________ in inflation in the long run, everything else held constant
A) an increase; an increase B) a decrease; a decrease C) no change; an increase D) no change; a decrease
The above figure shows the supply and demand curves for rice in the U.S. and Japan. Assume there is no trade between the two countries. If bad weather causes the supply curves in each country to shift leftward by the same amount, then
A) the price will increase in both countries. B) the price will decrease in both countries. C) the change in price cannot be determined. D) None of the above.