Explain the effect of real interest rate and planned aggregate expenditure.

Question

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Answer 1

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?

Answer 2

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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Answer 3

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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Answer 4

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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Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Answer 5

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.

Answer 6

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.

Answer 7

Chapter 12, Problem 1RQ

To determine

Explain the effect of real interest rate and planned aggregate expenditure.

Answer 8

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.