Consider an economy in the long run with real GDP equal to the level of potentia
ID: 1222710 • Letter: C
Question
Consider an economy in the long run with real GDP equal to the level of potential output Y^*. The market for financial capital is shown in the graph at right. Explain the slopes of the investment demand curve and the national saving curve. The investment demand curve is downward sloping since a rise in the real interest rate decreases the cost of investment. upward sloping since a rise in the real interest rate increases the cost of investment. downward sloping since a rise in the real interest rate increases the cost of investment. downward sloping since a fall in the real interest rate increases the cost of investment. The national saving curve is downward sloping because an increase in the interest rate leads households to increase their current consumption. downward sloping because an increase in the interest rate leads households to reduce their current consumption. upward sloping because an increase in the interest rate leads households to reduce their current consumption. upward sloping because an increase in the interest rate leads households to increase their current consumption. Suppose the government pursued a fiscal contraction by reducing the level of government purchases. Use the line drawing tool to draw a single line to show the effect of this change in fiscal policy. Properly label your line. Carefully follow the instructions above, and only draw the required objects. What would happen to the equilibrium interest rate, the amount of investment in the economy, and the long-run downward sloping since a tail in the real interest rate increases the cost of investment. The national saving curve is downward sloping because an increase in the interest rate leads households to increase their current consumption. downward sloping because an increase in the interest rate leads households to reduce their current consumption. upward sloping because an increase in the interest rate leads households to reduce their current consumption. upward sloping because an increase in the interest rate leads households to increase their current consumption. Suppose the government pursued a fiscal contraction by reducing the level of government purchases. Use the line drawing tool to draw a single line to show the effect of this change in fiscal policy. Property label your line. Carefully follow the instructions above, and only draw the required objects. What would happen to the equilibrium interest rate, the amount of investment in the economy, and the long-run growth rate in tills situation? This would result in in the equilibrium interest rate, in the amount of investment in the economy, and in the long-run growth rate. Now suppose the fiscal contraction occurs by increasing taxes. Suppose a shift the NS will occur due to change in level of taxes. This would result in in the equilibrium interest rate, in the amount of investment in the economy, and in the long-run growth rate.Explanation / Answer
Investment Demand Curve is downward sloping because at higher interest rates prevailinmg in the market investment activity is slowed down as oct of investment is rising.
National saving will be upward sloping as there is an increase because of high interest rates which reduces their current consumption and they will save more and forego current consmption in lieu of better rates they are getting in thier deposits.