Final answer:
The investment demand curve shifts to the right as a result of an increase in government spending, which stimulates economic activity and raises the demand for financial capital, often accompanied by higher interest rates.
Step-by-step explanation:
The investment demand curve will shift to the right as a result of an increase in government spending. When the government increases its spending, the Aggregate Demand (AD) curve shifts to the right, which can raise both income and price levels. This increased spending stimulates economic activity and can lead to higher demand for financial capital, often represented by higher interest rates due to increased competition for funds. This scenario can result in the 'crowding out' effect, where government borrowing leads to higher interest rates, potentially reducing private investment.
While an increase in interest rates could shift the demand curve for financial capital to the right, it generally signifies a greater cost of borrowing which reduces investment demand. On the contrary, a decrease in interest rates typically shifts the investment demand curve to the right because cheaper borrowing costs encourage more investment.