Economists sometimes argue that a temporary increase in government purchases, for example military purposes, will crowd our private investment. Create the saving-investment diagram for a closed economy to illustrate this point. Does it matter whether the increase in military spending is funded by taxes or borrowing.
-Draw the graph. Label both axis, curves, and all relevant points. Describe the initial equilibrium real interest.
-Explain which curve shifts, in which direction does it shift, and why? Show it in the graph.
-Explain the effects on equilibrium interest rate and equilibrium quantity of desired savings and investment, and crowding out effect.