Figure 6.5 Alt text for Figure 6.5: In figure 6.5, a graph comparing loanable funds and real interest rate.
Long description for Figure 6.5: The x-axis is labelled, loanable funds (billions of dollars per year), and the y-axis is labelled, real interest rate.3 lines are shown; Supply S1, S2 and Demand.The Demand line begins at the top left corner and slopes down to the bottom centre.Line S1 begins near the origin and slopes up to the top right corner.Line S2 follows the same slope as line S1, but is plotted to the left.The area between lines S1 and S2 is indicated by a left pointing arrow.The Demand line intersects line S1 at point A, a little more than half-way along both lines.The Demand line intersects line S2 at point B, a little more than half-way along both lines.Point C is marked on line S2,such that it is parallel to point A.An arrow points from point A to point C.
-Refer to Figure 6.5."Crowding out" of firm investment as a result of a budget deficit is illustrated by the movement from ________ in the graph above.

Question

Figure 6.5  Alt text for Figure 6.5: In figure 6.5, a graph comparing loanable funds and real interest rate.
Long description for Figure 6.5: The x-axis is labelled, loanable funds (billions of dollars per year), and the y-axis is labelled, real interest rate.3 lines are shown; Supply S1, S2 and Demand.The Demand line begins at the top left corner and slopes down to the bottom centre.Line S1 begins near the origin and slopes up to the top right corner.Line S2 follows the same slope as line S1, but is plotted to the left.The area between lines S1 and S2 is indicated by a left pointing arrow.The Demand line intersects line S1 at point A, a little more than half-way along both lines.The Demand line intersects line S2 at point B, a little more than half-way along both lines.Point C is marked on line S2,such that it is parallel to point A.An arrow points from point A to point C.
-Refer to Figure 6.5."Crowding out" of firm investment as a result of a budget deficit is illustrated by the movement from ________ in the graph above.

Quizplus · Accepted Answer

Crowding out occurs when increased government borrowing leads to higher interest rates, which in turn reduces private investment. The movement from A to B indicates an increase in interest rates and a decrease in investment, illustrating the crowding out effect.

Figure 65 Alt Text for Figure 6