If the investment curve is steep (i.e., investment is less sensitive to changes in the real interest rate), then an increase in government spending by $100 billion will cause:
A) a decrease in investments larger than $100 billion.
B) a decrease in investments equal to $100 billion.
C) an increase in investments equal to $100 billion.
D) an increase in investments larger than $100 billion.

Question

Quizplus · Accepted Answer

When the investment curve is steep, it indicates that investment is less sensitive to changes in the real interest rate. Therefore, an increase in government spending will lead to a crowding-out effect, where the increase in interest rates causes a decrease in investment, but not necessarily larger than the increase in government spending.

If the Investment Curve Is Steep (I