Question

In 2011 Greek citizens were concerned about the size of government debt. Fearful that the government might be unable to fulfill its promise to insure depositors in Greek banks against losses created by bank failures, depositors moved funds out of Greek banks.

What happened to domestic investment? Why?

Answer 1

The Domestic investment fell because the interest rate rose. If interest rates are increased then it will tend to discourage investment because investment has a higher opportunity cost. With higher rates, it is more expensive to borrow money from a bank.So, as a result domestic investments fell. The same happened in Greece.

In 2011 Greek citizens were concerned about the size of government debt. Fearful that the government might be unable to fulfill its promise to insure depositors in Greek banks against losses created by bank failures, depositors moved funds out of Greek banks.As a result Greece's net capital outflows rose.The demand for loanable funds shifted right. Both the equilibrium interest rate and the equilibrium quantity of loanable funds increased. So domestic investments fall because interest rate rose.