Looking back to Figures 15-5 and 15-6, review how the economy moved from the short-run equilibrium interest rate at 10 percent per year to the long-run equilibrium.
Now explain what would occur in both the long run and the short run if innovations shift up the demand for capital curve. What would happen if the government debt became very large and a large part of people's supply of capital was siphoned off to holdings of government debt? Draw new figures for both cases.