Question

In: Economics

1- Investors create the ---------- for capital. (Fill in the blanks) 2- JM Keynes believed that...

1- Investors create the ---------- for capital. (Fill in the blanks)
2- JM Keynes believed that during the Great Depression there was an------------------supply of capital.This results from the interest rate being fixed for some reason----------------its market equilibrium level. (Fill in the Blanks)
3- Traditional monetary policy is ineffective when nominal interest rates have reached a---------------lower bound. JM Keynes referred to this situation as a liquidity----------------(Fill in the blanks)
4- Suppose that whenever total income increases investment and saving increase by the same amount at any interest rate. Then which statement is correct:

a- The IS curve is perfectly vertical.

b- The IS curve would be flat (horizontal).

c- The IS curve would slope downward.

d- The IS curve would slope upward.

e- Fiscal policy is ineffective.

Solutions

Expert Solution

1. Investors create the finance/demand for capital.

The firms invest in capital when investors are willing to invest in the capital.

2.Keynes believed that during great depression, there was an Excess Supply of capital. This results from interest rate being fixed for some reason Below its equilibrium level.

3. Traditional monetary policy is ineffective when nominal interest rates have reached a Minimum/horizontal lower bound. JM Keynes referred to this situation as liquidity Trap.

4. The correct statement is B. When Is curve is horizontal, the increase in investment and total saving is same as the total income increase.


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