Question 18 2 pts When the government finances a deficit by borrowing money in the market for loanable funds this can cause the interest rate to raise and investment by private firms to decline. This is referred to as the: crowding out effect net exports effect real balances effect interest rate effect
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This increased demand can lead to an increase in the interest rate. Now, when the interest rate rises, it becomes more expensive for private firms to borrow money for investment purposes. As a result, private investment by firms may decline. Show more…
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Figure 32-5: Refer to the following diagram of the open-economy macroeconomic model to answer the questions that follow. Graph (a) Graph (b) NCO REAL INTEREST RATE QUANTITY OF LOANABLE FUNDS REAL INTEREST RATE NET CAPITAL OUTFLOW Graph (c) REAL EXCHANGE RATE QUANTITY OF DOLLARS Refer to Figure 32-5. Suppose that initially the economy is in equilibrium at r1 (point d) and e3 (point i). If the government removes import quotas, the exchange rate will move to e5. e4. e2. e1.
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