Answered: If real interest rates become negative,…

If real interest rates become negative, the neoclassical model of investment predicts there is now no limit to how much capital firms want to purchase.

MACROECONOMICS FOR TODAY

10th Edition

ISBN:9781337613057

Author:Tucker

Publisher:Tucker

Chapter8: The Keynesian Model

Section8.4: Why Investment Demand Is Unstable

Problem 1YTE

See similar textbooks

Related questions

Q: Consider two interest rate levels, and is, and the corresponding total demand curves Z, and Z, in…

A: Interest rate: It refers to the rate at which the people can take loans form the banks. The banks…

Q: Suppose that an increase in consumer confidence raises consumers’ expectations about their future…

A: Demand refers the total amount of goods and services that are willing and able to buy at the…

Q: In the Classical model, an decrease in savings would result in Multiple Choice A rise in interest…

A: According to classical economics, saving was a rising function of the rate of interest. The…

Q: Which of the following would not cause shift in the investment demand curve as the above graph…

A: The investment demand curve is downward sloping. It shows the relationship between investment by…

Q: The immediate determinants of investment spending are the Multiple Choice expected rate of return on…

A: Correct: expected rate of return on capital goods and the real interest rate

Q: a) Use an appropriate diagram, to explain how the Permanent Income Theory of Consumption reconciles…

A: The permanent income speculation is a hypothesis of buyer spending expressing that individuals will…

Q: When economists say “investment,” they are referring to financial investments, which are purely…

A: The bonds and stocks are the financial asset that gives the return to the investors. It is a way of…

Q: Suppose John Smith signs up to a fixed- interest mortgage. Then there is some unexpected inflation…

A: Inflation: It refers to the increase in the prices of goods and services in the economy. The more is…

Q: Answer the following with reference to the Income-Expenditure model with the planned investment…

A: The investment is the component of the aggregate demand which would also be included in the GDP. The…

Q: why do expectations play such an important role in investment demand

A: Macroeconomics analyzes the economy as a whole. It studies aggregate economic concepts such as…

Q: 35. According to Keynes, interest is a payment for A. O Consumer's preference B. Producer's…

A: To find : Interest is payment for.

Q: Discuss the lifecycle income hypothesis theory of consumption and explain its applicability in the…

A: As economies and societies developed, the study of economics got more complicated. Hence, as a…

Q: . Employment b. Laying off c. Maturity of Investment d. Promotion

A: There are many cases where spending will increase. Spending is dependent on several factors such as…

Q: One of the following cannot be considered as a factor that affect consumption Select one: a. Price…

A: Consumption function= c+ bY where; c= autonomous consumption b= marginal propensity to consume Y=…

Q: Explain why changes in consumption are unpredictable if consumers obey the permanent-income…

A: The permanent income hypothesis is an economics model that attempts to explain how consumption…

Q: Which of the following statement is false? A. Consumption smoothing occurs when people borrow…

A: Nominal interest rate refers to the interest rate that does not consider inflation into account…

Q: Suppose the real interest rate is 3%. In a closed economy, an increase in national savings, all else…

A: In an economy, changes in national savings will have a significant impact on real interest rate…

Q: hen elasticity of production is

A: The production function describes a boundary which depicts the limit of output which is obtainable…

Q: Consider an economy described by the following equations: Y = C + I + G Y = 5,000 G = 1,000 T =…

A: In equilibrium, Y = C + I + G

Q: In our model with a work-leisure decision in both time periods of life, the optimal choice of time…

A: Consumption and leisure mode represents U=f(Ct,lt) constraint Ct=<w*(1-l)+r*s Here Ct=…

Q: The level of a country’s private investment tends to be very volatile because… Select one: a.…

A: Aggregate demand = consumption + Gross investments + government spending + Net exports Private…

Q: According to the basic discounting principle, individuals value current consumption (i.e.…

A: Discounting would tend render costs and benefits that would occur during different time periods…

Q: According to our analysis of a worker's choice of how much to save for retirement using our model of…

A: Answer:- (D) An increase in the interest rate.

Q: COURSE: MACROECONOMICS - IS-LM MODEL Demonstrate under the assumptions of the IS-LM model the…

A: Investment Savings (IS) and Liquidity Preference-Money Supply (LM) are the two components of the…

Q: An inverse relationship between the rate of interest and the level of: income is suggested by the…

A: Interest rate changes affects economic activities in the economy. The investment is affected by the…

Q: the relationship

A: In his q-theory of investment,James Tobin put forward the view that the firms in turn base their…

Q: Explain whether each of the following statements is true or false : A). An increase in the ratio of…

A: The multiplier of money is described as a situation in which an initial deposit can lead to a final…

Q: Consider a household with wealth of $62,000. If the price level decreases by 8%, this household is…

A: Aggregate demand is downward sloping showing inverse relationship between price and real output…

Q: The output demand curve slopes upward because of the negative effect of the real interest rate on…

A: 1. At any price level in any time, the aggregate demand curve reflects the total of consumption,…

Q: What is the diference between a real interest rate and a nominal interest rate?What is the intuition…

A: An interest rate is a rate at which a borrower (the debtor) pays interest for the use of cash…

Q: What other factors besides interest rates will cause the investment demand curve to shift?

A: Investment demand has an inverse relationship with the interest rate. There are other factors also…

Q: explain why changes in consumption are unpredictable if consumer obey the permanent income…

A: Permanent income hypothesis contributes as a theory of consumer spending, where people will spend…

Q: Briefly explain whether each of the following statements is true or false. 7. A decline in total…

A: Solow Swan model explains the growth of output in the long run taking capital accumulation,…

Question

explain whether each of the following statements is true or false.

If real interest rates become negative, the neoclassical model of investment predicts there is now no limit to how much capital firms want to purchase.

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

SEE SOLUTION Check out a sample Q&A here

Step 1

VIEW

Step 2

VIEW

Step 3

VIEW

Step by step

Solved in 3 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.

Similar questions

Which of the following would not cause shift in the investment demand curve as the above graph shows? Select one: a. Business taxes b. Expectations c. Changes in real interest rates d. Acquisition, maintenance, and operating costs e. Technological change
Derive the investment function (using the neoclassical model of investment). Explain how investment responds to changes in Marginal Product of Capital and interest rate.
Using the Neoclassical model of Investment, mathematical equations and graphs, explain the real cost to rental firms of owning capital.
Calua is an economy in which people live for three periods. They receive an endowment in only one period as follows: 80 goods when young, or 90 goods when middle-aged or 115 goods when old. The real interest rate in Calua is 10%. Given this information, what endowment should a typical person choose? Assume the interest rate increases to 15%. Which endowment should a typical person now choose?
Explain why you agree or disagree with the following statement:“Negative real interest rates cannot exist in an economy that is properly functioning.”
In the Neoclassical model of determination of income in the long run we assumed that aggregate consumption was an increasing function of disposable income, , and nothing else. Suppose that instead we assume that consumption is an increasing function of disposable income, , and a decreasing function of the real interest rate, . Provide an economic rationale for making consumption a function of the real interest rate. How does this assumption change the national saving function relative to the benchmark model?
In the Neoclassical model of determination of income in the long run we assumed that aggregate consumption was an increasing function of disposable income, , and nothing else. Suppose that instead we assume that consumption is an increasing function of disposable income, , and a decreasing function of the real interest rate, . Provide an economic rationale for making consumption a function of the real interest rate. How does this assumption change the national saving function relative to the benchmark model Using the model developed in (1), use a diagram for the market for loanable funds to describe what happens to national saving, national investment, and the real interest rate when government expenditure increases. Make sure to also explain in your own words the economic intuition of your results.
Explain how the income from production is distributed to labor and capital according to the neoclassical theory of distribution.
Explain the term random walk in consumption. Under what conditions will consumption follow such a behavior? Aggregate consumption varies less than GDP and aggregate investment varies more. Can you reconcile these observations with assumption that consumption and investment decisions are taken by rational forward-looking agents? How do changes in r affect expected consumption growth? Interpret the effect of r on expected consumption in the light of precautionary saving.
why do expectations play such an important role in investment demand
According to the basic discounting principle, individuals value current consumption (i.e. consumption now) more than future consumption (i.e. consumption tomorrow). A) True B) False
In the discussion of the life-cycle hypothesis, income is assumed to be constant during the period before retirement. For most people, however, income grows over their lifetimes. How does this growth in income influence the lifetime pattern of consumption and wealth accumulation shown in Figure 17-12 under the following conditions? Consumers can borrow, so their wealth can be negative. Consumers face borrowing constraints that prevent their wealth from falling below zero. Do you consider case (a) or case (b) to be more realistic? Why?