Exercise 3 This exercise explores the impact of government spending on private-sector spending. Use Figure 12.2 to answer questions 1-6. Figure 12.2 G1 G2 PUBLIC-SECTOR OUTPUT 33 H1 H2 H3 PRIVATE-SECTOR OUTPUT 1 . If all debt is held internally and the government finances additional spending by borrowing, then an increase in government purchases would move the economy from point E to point 2. If the economy moves from point K to point A because of increased government spending, the amount of private sector spending crowded out is equal to the distance 3. Assume the government has a budget surplus and uses it to reduce the accumulated debt. As a result interest rates (rise, fall) and the economy moves from point E to point. 4. The situation described in questions 3 is referred to in the text as the effect. 5. External financing of the debt allows the economy to move from point E to point 6. In question 5, external financing allows public-sector goods to (increase, decrease; stay the same) 165