Equilibrium quantity of desired savings and investment

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Reference no: EM131085873

Economists sometimes argue that a temporary increase in government purchases, for example military purposes, will crowd our private investment. Create the saving-investment diagram for a closed economy to illustrate this point. Does it matter whether the increase in military spending is funded by taxes or borrowing.

-Draw the graph. Label both axis, curves, and all relevant points. Describe the initial equilibrium real interest.

-Explain which curve shifts, in which direction does it shift, and why? Show it in the graph.

-Explain the effects on equilibrium interest rate and equilibrium quantity of desired savings and investment, and crowding out effect.

Reference no: EM131085873

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