Using graphs, explain how indirect crowding out can occur when the government increases spending in an attempt to stimulate the economy
What will be an ideal response?
See the above figure. The original equilibrium is E1, where there is a contractionary gap. The government pursues expansionary fiscal policy by increasing spending. Its goal is to reach E2. However, the increased borrowing causes the interest rate to increase, so private investment spending falls. The aggregate demand curve shifts back to AD3.
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Which of the following is likely to shift the credit demand curve of an automobile manufacturer to the right, assuming all else equal?
A) An increase in the real interest rate B) A plan to increase production and expand to newer markets C) A plan to decrease production and exit from existing markets D) A decrease in the real interest rate
Which of the following job market signals are less costly for high-quality workers to send than low-quality workers?
A) Spending long hours at the office B) Sending emails to coworkers and supervisors at night and on weekends C) Leaving voice-mail message for colleagues before or after regular business hours D) all of the above
Crises that occasionally hit financial markets will increase the demand for money since:
A. the risk of holding money relative to other financial assets decreases. B. the return on financial assets increases. C. the return on money increases. D. there is no risk with holding money.
As the prevailing interest rate decreases, the opportunity cost of spending money
A. Decreases for both saver and borrower. B. Increases for both saver and borrower. C. Increases for the borrower and decreases for the saver. D. Decreases for the borrower and increases for the saver.