Question

Suppose that for each one-percentage-point increase in the interest rate, the level of investment spending declines by $2 billion. The change in the interest rate (according to the change you made to the money market in the previous scenario) therefore causes the level of investment spending to. After the multiplier effect is accounted for, the change in investment spending will cause the quantity of output demanded to by at each price level. The impact of an increase in government purchases on the interest rate and the level of investment spending is known as the effect.

Answer 1

Solution:

Suppose that for each one-percentage-point increase in the interest rate, the level of investment spending declines by $2 billion. The change in the interest rate (according to the change you made to the money market in the previous scenario) therefore causes the level of investment spending to fall. After the multiplier effect is accounted for, the change in investment spending will cause the quantity of output demanded to decrease at each price level. The impact of an increase in government purchases on the interest rate and the level of investment spending is known as the crowding-out effect.