3. Describe the relationship shown by the investment demand curve. A rise in real interest rates would raise the price of borrowing for households, so consumption would likely (increase, decline) , especially consumption of products usually bought on credit such as homes and automobiles. A rise in interest rates (increase, decline) the rate of return earned on savings, making saving more attractive, so savings would likely (increase, decline). The investment demand curve relates investment to the real rate of interest and the expected rate of ) that return. That is, the basic determinants of investment are ( businesses hope to realize from investment spending, and ( . When the real interest rate rises, investment ( increases, decreases); and when the real interest rate drops, investment increases-other things equal in both cases. Graphically the interest rate and expected rate of return are measured on the (horizontal, vertical) axis and the amount of investment is measured on the (horizontal, vertical) axis. The investment demand curve has a (_ positive, negative ) slope reflecting the ( direct, inverse ) relationship between the interest rate (the price of investing) and the aggregate quantity of investment goods demanded. Investment is (stable, unstable ) because, unlike most consumption, it can be put off. New business ideas and the innovations that spring from them do not come at a constant rate. State the four factors that explain why investment spending tends to be unstable a) b) c) d) As long as expected rates of return rise faster than real interest rates, investment spending may ( increase, decrease). This is most likely to occur during periods of economic ( recession, expansion ).
3. Describe the relationship shown by the investment demand curve. A rise in real interest rates would raise the price of borrowing for households, so consumption would likely (increase, decline) , especially consumption of products usually bought on credit such as homes and automobiles. A rise in interest rates (increase, decline) the rate of return earned on savings, making saving more attractive, so savings would likely (increase, decline). The investment demand curve relates investment to the real rate of interest and the expected rate of ) that return. That is, the basic determinants of investment are ( businesses hope to realize from investment spending, and ( . When the real interest rate rises, investment ( increases, decreases); and when the real interest rate drops, investment increases-other things equal in both cases. Graphically the interest rate and expected rate of return are measured on the (horizontal, vertical) axis and the amount of investment is measured on the (horizontal, vertical) axis. The investment demand curve has a (_ positive, negative ) slope reflecting the ( direct, inverse ) relationship between the interest rate (the price of investing) and the aggregate quantity of investment goods demanded. Investment is (stable, unstable ) because, unlike most consumption, it can be put off. New business ideas and the innovations that spring from them do not come at a constant rate. State the four factors that explain why investment spending tends to be unstable a) b) c) d) As long as expected rates of return rise faster than real interest rates, investment spending may ( increase, decrease). This is most likely to occur during periods of economic ( recession, expansion ).
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:**3. Describe the Relationship Shown by the Investment Demand Curve.**
A rise in real interest rates would raise the price of borrowing for households, so consumption would likely __decline__, especially consumption of products usually bought on credit such as homes and automobiles. A rise in interest rates __increase__ the rate of return earned on savings, making saving more attractive, so savings would likely __increase__.
The investment demand curve relates investment to the real rate of interest and the expected rate of return. That is, the basic determinants of investment are (___________________) that businesses hope to realize from investment spending, and (__________________________).
When the real interest rate rises, investment __decreases__; and when the real interest rate drops, investment increases—other things equal in both cases. Graphically the interest rate and expected rate of return are measured on the __vertical__ axis and the amount of investment is measured on the __horizontal__ axis. The investment demand curve has a __negative__ slope reflecting the __inverse__ relationship between the interest rate (the price of investing) and the aggregate quantity of investment goods demanded.
Investment is __unstable__ because, unlike most consumption, it can be put off. New business ideas and the innovations that spring from them do not come at a constant rate.
State the four factors that explain why investment spending tends to be unstable:
a) __________________________________.
b) __________________________________.
c) __________________________________.
d) __________________________________.
As long as expected rates of return rise faster than real interest rates, investment spending may __increase__. This is most likely to occur during periods of economic __expansion__.
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