In the late 1970s, the United States experienced a productivity slowdown that decreased the marginal product of capital. This caused:

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BlackTom AI · Accepted Answer

To start, let’s lay out the options and what each one would imply in the context of a productivity slowdown affecting the marginal product of capital.
Option 1: "a shift in the aggregate supply curve." A productivity slowdown typically affects the production capacity and cost conditions, which could influence AS in the long run, but the immediate impact of a lower marginal product of capital in the late 1970s is more directly tied to demand conditions through investment, not a static shift of AS. So this is not the most direct or correct channel.
Option 2: "a leftward shift of the IS curve." The IS curve captures goods-market equilibrium where investment equals saving at a given interest rate. A decline in the marginal product of capital reduces expected returns on investment, which lowers desired investment spending. With investment declining at each interest rate, the equilibrium level of output for any given interest rate falls, shifting the IS curve left. This matches the described mechanism of a productivity slowdown reducing investment demand and overall aggregate demand.
Option 3: "a decline in inflation expectations." While productivity slowdowns can influence inflation dynamics, a direct, primary channel from a productivity slowdown to inflation expectations is not as straightforward as the investment channel through the IS curve. This option describes a secondary or indirect effect rather than the main cause-and-effect relationship at issue.
Option 4: "a rightward movement along the IS curve." A slowdown in marginal product of capital reduces investment; rather than movement along the existing IS curve (which would imply investment changes due to interest rate changes while keeping the IS relationship intact), the more standard outcome is a shift of the entire IS curve, not just a movement along it. This makes this option less accurate as the primary explanation.
Option 5: "rising nominal interest rates." The effect described is about shifts in investment due to changes in the return on capital, not necessarily about nominal interest rate movements. While interest rates can move in response to policy or demand, the question focuses on the direct consequence of reduced marginal product of capital on the IS framework, which is best captured by the leftward shift of IS rather than a simple rate increase.
In summary, the most coherent and direct explanation is that a productivity slowdown lowers the marginal product of capital, reducing investment demand at each interest rate, which shifts the IS curve to the left, decreasing equilibrium output. The other options either describe different channels, less direct consequences, or misstate the primary effect of the productivity downturn on the goods market.

FA25 ECON 302 002 Final Exam (Chapters 7-9, 11-13, 19-20): Sample Questions

In the late 1970s, the United States experienced a productivity slowdown that decreased the marginal product of capital. This caused:

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