Question
Suppose that the investment demand curve in a certain economy is such that investment declines by $100 billion for every 1% increase in the real
Suppose that the investment demand curve in a certain economy is such that investment declines by $100 billion for every 1% increase in the real interest rate. Also, suppose that the investment demand curve shifts rightward by $150 billion at each real interest rate for every 1% increase in the expected rate of return from investment. If stimulus spending (an expansionary fiscal policy) by government increases the real interest rate by 2% but also raises the expected rate of return on investment by 1%, how much investment, if any, will be crowded out?
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