Assume the following.
• The MPC has a value of 0.8.
• The relationship between the interest rate, r, and investment, I, is given by the equation,
I = 20,000 - br,
Where b is a positive constant.
• Government purchases, G, are increased by $1,000.
In which of the following cases would there be no crowding out?
A) b = 0
B) b = 0.2
C) b = 0.8
D) b = 1

Question

Quizplus · Accepted Answer

If b = 0 in the investment equation, then changes in the interest rate will have no effect on investment. Therefore, an increase in government purchases will not lead to crowding out, as there will be no change in investment to crowd out.

Assume the Following. • the MPC Has a Value of 0.8