Use the neoclassical theory of investment to explain why technological progress that reduces the price of computers (and related information technology) impacts investment differently than technological progress that makes computers more productive
What will be an ideal response?
Expected improvements in productivity cause the marginal product of capital curve to shift up. Reductions in the price of capital goods (such as computers) cause the user cost of capital curve to shift down. In either case, the desired level of capital and of investment increase. Expected reductions in the price of capital goods increase the user cost of capital. The size of the increase in the desired level of capital depends on the size of the expected productivity increase and the actual price decrease relative to the expected price decrease.
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What impact does the Fed's raising the interest rate have on the money supply and on the price level?
A) An increase in interest rates raises the money supply and eventually reduces prices. B) An increase in interest rates lowers the money supply and raises the money demand, which will neutralize price increases. C) An increase in interest rates will increase investment spending and GDP, which will lower prices. D) An increase in interest rates reduces the money demand which will slow the growth in prices.
In a business cycle, a period from trough to peak may be referred to as ________
A) a contraction B) an expansion C) a recurrence D) all of the above E) none of the above