1 The potential positive feedback that government spending m

1. The potential positive feedback that government spending may have on investment is known as the . The potential negative effect that government spending may have on investment is known as the- effect 2. According to the Theory of Liquidity Preference, a fall in the that people wish to hold. As a result, falling interest rates stimulates investment spending and aggregate reduces the amount of money Interest Rate Money Supply 3. MD, of Money ecline in prices will cause house their desired money holdings, moving the interest rate to__.

Solution

Q1)

Answer: crowding in.

This is the positive effect of government spending; it increases aggregate demand (AD) of goods and services in the economy, which actually encourages private investments to satisfy those customers and to make profits.

Answer: crowding out.

This is the negative effect of government spending, when increasing such spending increases interest rates and reduces private investments. It happens in this way: suppose the increasing government spending increases government deficit; the government then wants to meet such deficit by increasing market interest rate; once the interest rate increases it crowds out private investors from the market.