Use the following to answer question 3.

Exhibit: Saving, Investment, and the Interest Rate 2

(Exhibit: Saving, Investment, and the Interest Rate 2) The economy begins in equilibrium at Point E, representing the real interest rate,
𝑟
1
, at which saving,
𝑆
1
, equals desired investment,
𝐼
1
. What will be the new equilibrium combination of real interest rate, saving, and investment if there is a technological innovation that increases the demand for investment goods?

Question

Use the following to answer question 3.

Exhibit: Saving, Investment, and the Interest Rate 2

(Exhibit: Saving, Investment, and the Interest Rate 2) The economy begins in equilibrium at Point E, representing the real interest rate, 
𝑟
1
 , at which saving, 
𝑆
1
 , equals desired investment, 
𝐼
1
 . What will be the new equilibrium combination of real interest rate, saving, and investment if there is a technological innovation that increases the demand for investment goods?

BlackTom AI · Accepted Answer

To approach this question, we start by understanding what a shift in investment demand does in the savings–investment framework.

Option A: Point A. This point would correspond to a lower real interest rate and a smaller or unchanged level of investment relative to the initial equilibrium. If the investment demand curve shifts to the right (due to a technological innovation increasing demand for investment goods), we would not expect the new equilibrium to move to a lower interest rate or a clearly reduced investment. Therefore Point A is inconsistent with the direction of the shift.

Option B: Point B. This point is at a higher interest rate than the initial equilibrium but sits on the vertical axis corresponding to a higher saving level than S1, yet it does not reflect the new equilibrium where the investment demand has increased. The shift in I demand should move the intersection to a new point where saving and investment lines intersect at a higher level of investment and (usually) a higher interest rate; however, Point B may not capture the full simultaneity of higher I and higher S in the new equilibrium.

Option C: Point C. This point lies at a lower r (interest rate) and a much lower saving level, implying a contraction in investment demand rather than an expansion. Since the scenario describes an increase in demand for investment goods, a move to lower r and lower saving is inconsistent with the mechanism of investment-demand shifting right. Therefore C is incorrect.

Option D: Point D. When investment demand increases, the I2 curve shifts to the right of I1. The new intersection with the saving curve occurs at a higher real interest rate and a higher level of saving and investment than the initial equilibrium E. Point D is positioned where I2 intersects the saving schedule, reflecting an increased r and increased S and I relative to E. This aligns with the standard result: an outward shift in investment demand raises both the real interest rate and the quantity of saving and investment in the new equilibrium.

In summary, the rightward shift of the investment demand curve due to the technological innovation raises the equilibrium interest rate and moves the economy to a higher saving and investment point, which corresponds to Point D. The other points correspond to scenarios inconsistent with an outward shift of investment demand (lower r or lower S and I) or misalignment with the direction of the shift.

BU.220.610.51.FA25 M2 Practice Quiz

查看解析

登录即可查看完整答案

类似问题

Economists use _____ as a model to explain how savers and borrowers come together to determine the equilibrium rate of interest.

Businesses suddenly view investment projects as riskier. All else equal, what happens?

Ceteris paribus, a decrease in the demand for loanable funds

The demand for loanable funds includes demand for i. loans. ii. stocks. iii. bonds.

The figure above shows the loanable funds market. The equilibrium real interest rate is percent, and the equilibrium quantity of loanable funds is .

In the long run, the interest rate is determined in the _____ market.

All other things being equal, a decrease in the supply for loanable funds:

更多留学生实用工具

考试浏览器助手

风格化写作助手

论文查重助手

文献引用助手

课堂转译助手

课堂笔记助手

Quiz搜索助手

学校历年真题

智能刷题助手

智能匹配练习

希望你的学习变得更简单