10. The crowding-out effect of the public debtConsider the investment demand (ID) curve on the following graph.REAL INTEREST RATE (Percent)109876543210300340420ID380460 500INVESTMENT (Billions of dollars)Aa AaInitially, the interest rate is 3% and the quantity of investment demanded is $420 billion. Imagine an increase in thepublic debt causes the interest rate to rise from 3% to 7%. The increase in the public debt crowds outof private investment. (Assume that the increase in the public debt does not affect the position ofthe investment demand curve.)An increase in the public debt tends to increase the real interest rate and crowd out private investment. By usingadditional public debt to finance public investments that are complements to private investment, the government canthe size of the crowding-out effect.

Crowding out is an economic concept that refers to the phenomenon where increased government…

Initially, the interest rate is 3% and the quantity of inv public debt causes the interest rate to rise from 3% tc of private investment. (Assume that the investment demand curve.) An increase in the public debt tends to increase the re additional public debt to finance public investments the the size of the crowding-gut effect.

Initially, the interest rate is 3% and the quantity of inv public debt causes the interest rate to rise from 3% tc of private investment. (Assume that the investment demand curve.) An increase in the public debt tends to increase the re additional public debt to finance public investments the the size of the crowding-gut effect.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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