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

Which DISTANCE shows the private investment that has been crowded out?

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The diagram

The answer

The distance L H. At the higher rate r₂, private demand read along D₁ has fallen from I₁ to I₂ — distance LH, squeezed out by the government. Find private investment on the ORIGINAL private demand curve D₁, at the new rate r₂: that is point G, giving quantity I₂ (point L on the axis). Before the government arrived it was I₁ (point H). The horizontal distance L to H is the private investment crowded out. Total lending went UP from 4 to 5 — but the private share went DOWN from 4 to 3. Both facts are true at once, and saying both is what earns the mark.

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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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