Consider the investment function of the IS model. Suppose that in the long-run 20% of GDP is spent on investment. Moreover, a one percentage-point increase of the real interest rate reduces the share of investment in GDP by one percentage point. Suppose that at some time t the real interest rate is equal to -1% while the rate of return of physical capital (think of it as the marginal product of capital) is 3%. What is the share of investment in GDP at time t?

Consider the investment function of the IS model. Suppose that in the long-run 20% of GDP is spent on investment. Moreover, a one percentage-point increase of the real interest rate reduces the share of investment in GDP by one percentage point. Suppose that at some time t the real interest rate is equal to -1% while the rate of return of physical capital (think of it as the marginal product of capital) is 3%. What is the share of investment in GDP at time t?

Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)

14th Edition

ISBN:9781305506381

Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Chapter5: Business And Economic Forecasting

Section: Chapter Questions

Problem 2E

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