The question is: “Which of the following factors is least likely to reduce the level of investment?” and the answer is Federal budget surpluses. Am I right by coming to this conclusion by saying: budget surplus = less savings = increase in interest rates = increased investing? or is it budget surplus = more savings = decrease in interest rates = increased capital investing?
IMO second one is correct. Budget surplus is like savings by the Govt rather than an individual. More savings imply decreased interest rates (due to extra supply of funds) which implies increased investing…
Budget surplus -> “lower government spending” -> IS curve shifts left, interest rate goes down, AD shifts left, Price goes down -> LM curve shifts right, move along IS curve with higher investments, further reduction of price with another shift of LM curve and shift of AS curve.
here is my understanding: Y=C+I+G+Nx Y= C+T+I+G-T+Nx I= (Y-C-T)+(T-G)+Nx assuming, In closed economy Nx=0 then: I= private savings + Public savings, if Public savings is surplus, Investment will increase. As my memories about ISLM model, IS curve will move to the right, interest goes down, not as explained by maratikus. Budget surplus is not also necessary “lower govt spending”.
Budget surplus = more taxes, less spending => more saving = more investing.