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A-Level Economics · Loanable funds (crowding out) diagram question

Which point on the interest-rate axis shows the HIGHER interest rate the government's borrowing produces?

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The diagram

The answer

Point B. Read across from F: the rate rises from r₁ (A) to r₂ (B). That rise is the entire cost of crowding out. Read across from the new equilibrium F to the interest-rate axis: point B, r₂. A huge customer turning up and wanting an enormous quantity puts demand pressure on the price, and in this market the price is the interest rate.

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This is one of 6 questions on the loanable funds (crowding out) diagram — every corner lettered, every wrong answer diagnosed.

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