Investment Demand AS AD, (-120) AD2 (a90) AD, (I-60) 0 $30 60 90 120 150 Investm

Question

Investment Demand AS AD, (-120) AD2 (a90) AD, (I-60) 0 $30 60 90 120 150 Investment (S) Real GDP (s) efer to the above graphs, in which the numbers in parentheses near the A abels indicate the level,of investment spending associated with ea D1, AD2, and AD3 abels indicate the level of investment spending associated with each curve, respectively. Al umbers are in billions of dollars. The interest rate and the level of investment spending in the conomy are at point Don the investment demand curve. To achieve the long-run goal of a oninflationary full-employment output Qf in the economy, the Fed should: 1) Decrease aggregate demand by increasing the interest rate from 2 to 4 percent 2) Decrease aggregate demand by increasing the interest rate from 4 to 6 percent 3) Increase aggregate demand by decreasing the interest rate from 4 to 2 percent 4) Increase the level of investment spending from $120 billion to $150 billion

Explanation / Answer

Ans: Decrease aggregate demand by increasing the interest rate from 4 to 6 percent.

Explanation:

To achieve real GDP of Qf, investment spending should be $90 billion. It is seen from the left figure, investment spending is $90 billion at point C on the investment demand curve.At point C, interest rate is 6%.

Thus, Fed should decrease aggregate demand by increasing interest rate from 4 to 6 percent.

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