Suppose firms expect future output to be higher and future interest rates to be higher. Given this information, how will firms alter investment in the current period? Explain
What will be an ideal response?
The increase in expected future output will cause firms to revise upwards their expectations of future profits. This, all else fixed, will cause an increase in the present value of future expected profits and will tend to increase investment. The increase in the interest rate, however, will tend to decrease investment because it will reduce the discounted present value of future expected profits. The effects, therefore, on investment are ambiguous.
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a. True b. False
If you were the chairman of the Fed and had to develop effective countercyclical monetary policy during a recession, you would lower
a. the legal reserve requirement, cut the discount rate, and sell government bonds on the open market b. the legal reserve requirement, raise the discount rate, and sell government bonds on the open market c. the legal reserve requirement, raise the discount rate, and buy government bonds on the open market d. the discount rate, cut the discount rate, and raise the margin requirement e. the reserve requirement, lower the discount rate, and buy government bonds on the open market