/*! This file is auto-generated */ .wp-block-button__link{color:#fff;background-color:#32373c;border-radius:9999px;box-shadow:none;text-decoration:none;padding:calc(.667em + 2px) calc(1.333em + 2px);font-size:1.125em}.wp-block-file__button{background:#32373c;color:#fff;text-decoration:none} Q8. Refer to the table in Figure 10.... [FREE SOLUTION] | 91影视

91影视

Log out

Learning Materials

Features

Discover

Chapter 10: Q8. (page 215)

Refer to the table in Figure 10.5 and suppose that the real interest rate is 6 percent. Next, assume that some factor changes such that the expected rate of return declines by 2 percentage points at each prospective level of investment. Assuming no change in the real interest rate, by how much and in what direction will investment change? Which of the following might cause this change: (a) a decision to increase inventories; (b) an increase in excess production capacity?

Short Answer

Expert verified

The investment will decline by $5 billion, and the investment curve will shift toward the left.

Option (b): an increase in excess production capacity is the cause of investment decline.

Step by step solution

01

Change in investment curve

According to the given graph, the equilibrium level of aggregate investment at a 6% real interest rate is $25 billion.

Since the expected rate of return has declined by 2%, the investment at 6% expected rate of return will slip to the same investment at a 4% rate of return (shown by pink curve).

Therefore, the investment will fall by $5 billion (= 25 鈥� 20), and the investment curve will shift to the left.

02

Reason for the shift in investment curve

A decision to increase planned inventories means increasing the investment on a project with a lower return rate. It is practically not possible. Also, increased investment will shift the curve to the right.

An increase in excess production capacity will decrease the investment demand because the firm already has unused machines to satisfy the production requirements. Thus, there is no need to increase the investment as the expected profit has declined.

Therefore, the curve will shift to the left.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Over 30 million students worldwide already upgrade their learning with 91影视!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

Suppose that disposable income, consumption, and saving in some country are \(200 billion, \)150 billion, and \(50 billion, respectively. Next, assume that disposable income increases by \)20 billion, consumption rises by \(18 billion, and saving goes up by \)2 billion. What is the economy鈥檚 MPC? Its MPS? What was the APC before the increase in disposable income? After the increase?

Use your completed table for problem 1 to solve this problem. Suppose the wealth effect is such that \(10 changes in wealth produce \)1 changes in consumption at each income level. If real estate prices tumble such that wealth declines by \(80, what will be the new level of consumption and saving at the \)340 billion level of disposable income? The new level of saving?

Level of Output and Income (GDP = DI)
Consumption
Saving
APC
APS
MPC
MPS
\(240
\)244
-$4
1.016
-0.016
0.8
0.2
2602600100.8
0.2
28027640.985
0.014
0.8
0.2
30029280.9730.0260.8
0.2
320308120.962
0.037
0.8
0.2
340324160.9520.0470.8
0.2
360340200.944
0.055
0.8
0.2
380356240.9360.0630.8
0.2
400372280.930.070.80.2

What will the multiplier be when the MPS is 0, 0.4, 0.6, and 1? What will it be when the MPC is 1, 0.90, 0.67, 0.50, and 0? How much of a change in GDP will result if firms increase their level of investment by $8 billion and the MPC is 0.80? If the MPC instead is 0.67?

Which of the following scenarios will shift the investment demand curve right? Select one or more answers from the choices shown.

  1. Business taxes increase.

  2. The expected return on capital increases.

  3. Firms have a lot of unused production capacity.

  4. Firms are planning on increasing their inventories.

If a \(50 billion initial increase in spending leads to a \)250 billion change in real GDP, how big is the multiplier?

  1. 1.0

  2. 2.5

  3. 4.0

  4. 5.0
See all solutions

Recommended explanations on Economics Textbooks

Taxation Economics

Read Explanation
View all explanations

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.