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Chris M., M.S.W. Social Work

Category: Business and Finance Homework

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Suppose that the investment demand curve in a certain

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Suppose that the investment demand curve in a certain economy is such that investment declines by $110 billion for every 1 percentage point increase in the real interest rate. Also, suppose that the investment demand curve shifts rightward by $150 billion at each real interest rate for every 1 percentage point increase in the expected rate of return from investment. If stimulus spending (an expansionary fiscal policy) by government increases the real interest rate by 2 percentage points, but also raises the expected rate of return on investment by 1 percentage point, how much investment, if any, will be crowded out? JA: The Tutor can help you get an A on your homework or ace your next test. Is there anything else important you think the Tutor should know? Customer: no JA: I'm sending you to a secure page on JustAnswer so you can place the $5 fully refundable deposit now. While you're filling out that form, I'll tell the Tutor about your situation and connect you two.

The answer is $70 billion. Investment declines $220 billion due to the 2% interest rate increase, but increases (demand curve shifts rightward) $150 billion from a 1% rise in expected rate of return. The net result is a $70 billion decrease (crowding out) in investment.