During the most recent recession, some economists argued that the change in the interest rates that comes about due to deficit spending implied in the demand and supply of financial capital graph would not occur. A simple reason was that the government was stepping in to invest when private firms were not. Using a graph, explain how the use by the government in investment offsets the deficit demand.

Impact of Recession :

Recessions are characterized as periods of reduced economic activity, including indices of economic performance such as unemployment and GDP. Recessions damage all types of businesses, large and small, due to tightening lending conditions, lower demand, and widespread fear and confusion.

If the government steps in to invest where private enterprises are unwilling, interest rates will remain unchanged.

The cost of capital, or the rate at which interest must be repaid on a loan, is referred to as the interest rate.

The quantity of money supplied and requested in the economy as a percentage of actual GDP is referred to as financial capital.

Follow the steps below using the graph: First, the government raises capital demand to finance its deficit. As a result, the demand curve for financial capital shifts to the right from DO to D1, and the interest rate rises from 5% to 7%. The equilibrium shifts from E0 to E1.

Step 2: Government spending would enhance the supply of financial capital in the economy if private enterprises were unable to do so due to the crowding-out problem. The supply curve would move to the right, causing the interest rate to return to its previous level of 5%. As a result, the equilibrium is shifted from E1 to E2. As a result, government spending balances off deficit demand.