Consider the investment function of the IS model. Suppose that in the long-run 20% of GDP is spent on investment. Moreover, a one percentage-point increase of the real interest rate reduces the share of investment in GDP by one percentage point. Suppose that at some time t the real interest rate is equal to -1% while the rate of return of physical capital (think of it as the marginal product of capital) is 3%. What is the share of investment in GDP at time t?

Consider the investment function of the IS model. Suppose that in the long-run 20% of GDP is spent on investment. Moreover, a one percentage-point increase of the real interest rate reduces the share of investment in GDP by one percentage point. Suppose that at some time t the real interest rate is equal to -1% while the rate of return of physical capital (think of it as the marginal product of capital) is 3%. What is the share of investment in GDP at time t?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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