(Exhibit: Saving, Investment, and the Interest Rate 1) Reference: Ref 3-1 (Exhibit: Saving, Investment, and the Interest Rate 1) The economy begins in equilibrium at
Point E₁, representing the real interest rate, r₁ , at which saving, S , equals desired
Investment, I₁ . What will be the new equilibrium combination of real interest rate, saving, and
Investment if the government cuts spending, holding other factors constant?

Question

(Exhibit: Saving, Investment, and the Interest Rate 1)

Reference: Ref 3-1

(Exhibit: Saving, Investment, and the Interest Rate 1) The economy begins in equilibrium at
Point E₁, representing the real interest rate, r₁ , at which saving, S , equals desired
Investment, I₁ . What will be the new equilibrium combination of real interest rate, saving, and
Investment if the government cuts spending, holding other factors constant?

Quizplus · Accepted Answer

According to the exhibit, if the government cuts spending, it will decrease investment demand, shifting the IS curve leftward. This will result in a new equilibrium at Point B, where the real interest rate is lower, and saving is higher than before.