Q1. Table: Investment Projects Project Rate of return Cost A 16% $1,000 B 13 $2,
ID: 1108981 • Letter: Q
Question
Q1. Table: Investment Projects
Project
Rate of return
Cost
A
16%
$1,000
B
13
$2,000
C
9
$500
D
5
$500
E
2
$10,000
Suppose the table shows all of the potential investment projects currently available in an economy. If the market interest rate were equal to 6%, the amount of investment spending would equal $_______________.
Q2. Suppose the government increases taxes by $100 billion but does not change its own spending. If the MPC is 0.8, the resulting change in Y* would be $_________ billion.
Q3 . Crowding out is a phenomenon:
where overproduction in the goods market leads to a sharp drop in the aggregate price level.
where an increase in imports causes the overall domestic production to fall.
where an increase in the government's borrowing causes interest rates to rise, resulting in a decrease in private investment spending.
in which an increase in the government's budget surplus decreases overall investment spending.
Project
Rate of return
Cost
A
16%
$1,000
B
13
$2,000
C
9
$500
D
5
$500
E
2
$10,000
Explanation / Answer
2. Change in Y = - MPC x Change in Taxes / (1 - MPC)
Change in Y = - 0.8 x $ 100 billion / (1- 0.8) = - 0.8 x 100 billion / 0.2 = - $ 400 billion
So, Y declines by $ 400 billion.
3. where an increase in the government's borrowing causes interest rates to rise, resulting in a decrease in private investment spending.
Crowding out refers to decline of private investment due to fiscal expansion. Fiscal expansion could be in the form of Increase in government spending or Decline in tax rates.
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