Investment occurs when:
a. firms are very profitable and have lots of extra cash on hand.
b. there is a reduction in risk-aversion.
c. the expected real interest rate is less than the expected real return on the investment project.
d. individuals realize that there are greater long-term gains in the equity and credit markets.
Ans: c. the expected real interest rate is less than the expected real return on the investment project.
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Suppose the economy is initially operating at full employment. A fiscal policy action that results in an increase in the size of the budget deficit will cause which of the following in the long run?
A) an increase in real GDP. B) have no effect on both the level and composition of real GDP. C) a reduction in the price level. D) change the composition of real GDP.