Refer to the table below and suppose that the real interest rate is 6 percent. N
ID: 1094708 • Letter: R
Question
Refer to the table below 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.
Instructions: Enter your answer as a whole number.
a. Assuming no change in the real interest rate, by how much and in what direction will investment change?
Investment will (increase OR decrease?) by $______ billion.
The investment schedule will shift to the RIGHT OR LEFT ?
b. Which of the following might cause this change:
An increase in excess production capacity A decision to increase inventories Refer to the table below 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. Instructions: Enter your answer as a whole number. a. Assuming no change in the real interest rate, by how much and in what direction will investment change? Investment will (increase OR decrease?) by $______ billion. The investment schedule will shift to the RIGHT OR LEFT ? b. Which of the following might cause this change: An increase in excess production capacity A decision to increase inventories
Explanation / Answer
a. Investment will decrease since the real rate of interest is unchanged but rate of return has declined by the 2 %. Hence, it will drag down investment from $25 Billion to $20. Hence there shall be decrease of $5 billion. Investment shall shift to left due to lower rate of return on investment.
b. Firm has already extra capacity and it will not increase it more. it has already unused capacity. Thus, only inventory will undergo upward change
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