Suppose that American firms become more optimistic and decide to increase investment expenditure today in new...

Suppose that American firms become more optimistic and decide to increase investment expenditure today in new factories and office space.

a. How will this increase in investment affect output, interest rates, and the current account?

b. Now repeat part (a), assuming that domestic investment is very responsive to the interest rate so the U.S. firms will cancel most of their new investment plans if the interest rate rises. How will this affect the answer you gave previously?

Solutions

Expert Solution

Answer American companies are now optimist and want to incur investment expenditure on new factories and office space. Increase in investment will increase the output because with investment in productive activities production and employment will increase .

With increase in investment activities interest rate will decrease. The reason is that investment will increase production , employment and output. With increase in money supply value of money decrease and interest rate will decrease.

Answer Part B There is inverse relation in investment and interest rate. With increase in interest rate investment will decrease and production and output will decrease. Boom will convert into depression. This answer is opposite to the first answer.

Rahul Sunny answered 1 year ago

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