Question

In: Economics

Study the diagrams below and answer the following question:

3. Which of the following statements are correct?

a. Diagram A illustrates that investment spending takes place when firms increase their spending on capital goods.

b. Diagram A illustrates that in the event of a rise in the interest rate an upward movement will take place along the investment curve.

c. Diagram B illustrates that an increase the level of output and income will cause a rightward shift of the investment curve.

d. Diagram A illustrates that investment spending is negatively related to the interest rate and Diagram B illustrates that investment spending is positively related to the level of output and

income.

1. a, b, c and d

2. Only b, c and d

3. Only a, c and d

4. Only b and d

5. Only b and c

Expert Solution

Since the negative relationship between the interest rate and investment tells us that a rise in the interest rate will lead to a decline in the investment demand along the same curve. Hence statement B is False.

Hence we rule out all those options having Statement B

From 1,2,3,4,5 option only 3 doesn't contain B

hence correct option is 3.

Also from the definition of investment:---

it is expenditure on capital goods

it is positively related to income => more Y means more investment or vice-versa => outward shift in investment curve.

it is negatively related to income => more i mean less investment or vice-versa=> movement along in investment curve.

Rahul Sunny answered 2 years ago

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