Question

LifeCycle Biotech Company plans to invest $100 million into a new facility. It plans to use $20 million from its reserves and sell bonds at an interest rate of 4 percent to the public to raise the remaining $80 million. At the same time the U.S. has a budget deficit and decides to sell U.S. bonds to the public for 5 percent.

a) Will LifeCycle Biotech Company make the investment?

• No

• Yes

b) The government is now in competition with LifeCycle Biotech Company for capital. The result is an example of

• an automatic stabilizer.

• a Keynesian approach.

• a transfer payment.

• crowding out.

Answer 1

Q-1 :: ANSWER :: NO

=> Explanation ::

Lifecycle Biotech Company Is Private Firm And Want To Invest $100 Million In New Facility and They Issue 4% Bonds But US Government Also Issue 5% Bonds For Making Investment So Here Crowding Out Effect Occur Because Of US Government Provide Higher Interest Rate Than Private Sectors Public Invest In The US Bonds Because It Provide Security to The Investor But Private Firms Don't. So for That Reason Lifecycle Biotech Did Not Make Investment

Q-2 :: ANSWER :: (D) Crowding Out

=> Explanation ::

Crowding out Effect Refers To the Increase In Interest rate cause Reduce In Private Investment Spending So That It Decrease The Total Investment in The Country That Is Called Crowding Out Effect

In above Situation Lifecycle Biotech Want Investment by 4% Bonds But Government Issue 5% Bonds For Their Budget Deficit So Lifecycle Biotech Could Not Able to Make Investment So Private Investment/Spending Decrease Because Of The High Government Interest Rate So it is Crowding Out Effect