Suppose that the interest rate has no effect on investment. In which of the foll

Question

Suppose that the interest rate has no effect on investment. In which of the following cases might this happen? A. Firms may be so pessimistic about sales that they do not want to borrow at any interest rate. Capital restrictions in other countries may reduce financial inflows. C. Consumers may have an increase in consumer confidence, causing them to save less. D. The government might attempt to increase tax rates. If the interest rate has no effect on investment, how would this change the slopes of the following curves? The slope of the IS curve would be vertical. The slope of the LM curve would be unaffected The slope of the AD would be vertical.

Explanation / Answer

Option A when the firms turn pessimistic.They will not undertake any investment in this case even when interest rates fall.

Slope of the IS curve will become steep or increase. As large changes in interest rate will lwad to only minute change in investment.

LM - unaffected

AD - will become steeper.

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