FIGURE 15- 2
-Refer to Figure 15- 2.The market for financial capital is initially in equilibrium at point E1.If the government then institutes a policy that encourages firms to increase their desired investment,

Question

FIGURE 15- 2 
-Refer to Figure 15- 2.The market for financial capital is initially in equilibrium at point E1.If the government then institutes a policy that encourages firms to increase their desired investment,

Quizplus · Accepted Answer

When the government encourages firms to increase their desired investment, the demand for financial capital increases, shifting the demand curve to the right from D1 to D2. This leads to a higher equilibrium interest rate (from i1 to i2) and a higher quantity of financial capital supplied by households (from S1 to S2). Therefore, both the flow of investment and saving increase in the new equilibrium point E2.