Principles of Macroeconomics
6th Edition
ISBN: 9780073518992
Author: Robert H. Frank, Ben Bernanke Professor, Kate Antonovics, Ori Heffetz
Publisher: McGraw-Hill Education
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Question
Chapter 12, Problem 1RQ
To determine
Explain the effect of real interest rate and planned aggregate expenditure.
Expert Solution & Answer
Explanation of Solution
- If the real interest rate increases, then people will desire to save more than they are essentially consuming.
- A higher interest rate makes it costly to finance consumer durables and housing, which causes to decrease the spending on those items.
- If the real interest rate increases, then the firm will purchase less new capital as the cost of borrowing increases the finance of capital goods purchased.
Thus, the higher real interest rate leads to decrease both the planned aggregate expenditure components of consumption and investment.
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Students have asked these similar questions
The interest rate effect states that a lower price level reduces the amount of money people wish to hold. When they lend out their excess savings, the interest rate falls. How does this affect investment spending?
Why will a reduction in the real interest rate increase investment spending, other things equal? Why is investment spending unstable?
How does a change in the interest rate affect aggregate investment? What if firms prefer to pay for investment spending out of retained earnings? Does a change in the interest rate still affect aggregate investment?
Chapter 12 Solutions
Principles of Macroeconomics
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Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.Similar questions
- Why is investment spending unstable?arrow_forwardWhy is inventory investment counted as part of aggregate spending if it isn’t actually sold to the final enduserarrow_forwardDoes the amount of government spending in an economy respond directly to changes in aggregate income, wealth, or interest rates? Does it respond indirectly to changes in these variables?arrow_forward
- If saving dropped sharply in the economy, what would likely happen to investment? Why?arrow_forwardIf savings is greater than investment, what is the implication for aggregate demand? Explain.arrow_forwardAn increase in households’ desired money holding causes an increase in interest rates. How does this affect investment spending and aggregate demand?arrow_forward
- Do you think there is a predictable relationship between the business cycle and aggregate investment spending ? Why or why not?arrow_forwardHow is it possible for investment spending to increase even in a period in which the real interest rate rises?arrow_forwardWhich statement most accurately represents the effect of rising stock prices on aggregate expenditure?arrow_forward
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