How does a decline in the real interest rate cause an increase in investment?
What will be an ideal response?
The real interest rate is the reward for saving and the cost of borrowing. A reduced interest rate will encourage more spending on both consumption and investment. Business firms, in particular, will use available funds to purchase new capital goods from which to generate future income, instead of holding financial assets (e.g., government bonds) that offer a reduced income. The purchase of capital goods will be financed by borrowing, as well, so long as the expected income from use of the capital goods exceeds the (reduced) cost of borrowing.
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Consider the labor market for heath care workers. Because of the aging population in the United States, the output price for health care services has increased. Holding all else equal, the equilibrium quantity of health care employees would
a. increase. b. decrease. c. not change. d. It is not possible to determine what happens to the equilibrium quantity.
Since 1950
A) economic expansions in the United States have been so short that expansions barely exist. B) the average length of expansions in the United States have become shorter as compared to before 1950. C) the average length of expansions in the United States have become longer as compared to before 1950. D) the average length of expansions in the United States are about the same length as compared to before 1950.