3. Suppose the aggregate investment function for the economy is given by I $400-

Question

3. Suppose the aggregate investment function for the economy is given by I $400- 40(R) where / represents the level of investment expenditures and R represents the market rate of interest. Further assume the arrent rate of interest is 109i) (R 10.0) a. How much will investment expendirures in the economy change if interest rates fall by two percentage points? b. Would the level of autonomous investment change? Why? What factors might cause ‘he investment curve given by the investment function mentioned c. carlicr to shift to the left? d. What factors might cause the interest rate in this

Explanation / Answer

(3)

I ($) = 400 - 40R

Currently, when R = 10, I = 400 - (40 x 10) = 400 - 400 = 0

(a) When R = 10% - 2% = 8%,

I ($) = 400 - (40 x 8) = 400 - 320 = 80

Change in investment ($) = 80 - 0 = 80 (Increase)

(b) Autonomous investment remains unchanged at $400 because it is independent of any change in interest rate.

(c) Investment curve will shift to the left if any determinants other than interest rate change. For example, lower investor confidence, repeal of an investment tax credit or higher and more cumbersome regulatory requirements will discourage investment demnd, shifting investment demand curve toward left.

(d) Interest rate will decrease if Central Bank increases money supply, which will shift money supply curve rightward and decrease interest rate.

NOTE: As per Chegg answering guidelines, first question is answered.

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