Question 1

A reduction in the interest rate, while stimulating investment in the short run, has little or no effect on economic growth in the long run.

Accepted Answer

A reduction in interest rates can have a positive long-term impact on economic growth by promoting borrowing and investment, which can lead to increased productivity and expansion. However, the extent to which interest rate reductions impact long-term growth depends on a variety of factors such as the overall state of the economy, the structure of financial markets, and the level of government intervention.

Question 2

Higher interest rates encourage investment.

Accepted Answer

Higher interest rates make borrowing more expensive, which can discourage investment by increasing the cost of financing projects.

Question 3

Explain how an increased money supply affects the quantity of investment demanded and the aggregate demand. Illustrate your answer with a graph of the money market, investment demand and an AD-AS graph.

Accepted Answer

The answer of Explain how an increased money supply affects...

Question 4

An increase in the cost of capital goods will generally cause an increase in investment by shifting the investment demand curve to the right.

Accepted Answer

An increase in the cost of capital goods will generally cause a decrease in investment by shifting the investment demand curve to the left. Higher cost of capital goods means it is more expensive for businesses to invest, and therefore they will invest less.

Question 5

Changes in the interest rate will lead to shifts in the investment demand curve.

Accepted Answer

The answer of Changes in the interest rate will lead...

Question 6

Explain how each of the following events affects (i) the investment demand curve; and (ii) aggregate demand and/or aggregate supply curve.
a. an increase in interest rates
b. a decrease in interest rates
c. an increase in the cost of capital goods
d. a decrease in the level of economic activity
e. a decrease in the minimum wage
f. a natural disaster that destroys much of the capital stock

Accepted Answer

The answer of Explain how each of the following events...

Question 7

An investment tax credit is a type of capital gains tax.

Accepted Answer

An investment tax credit is not a type of capital gains tax. It is a tax incentive that allows taxpayers to reduce their tax liability based on a percentage of their investment in certain qualified assets, such as renewable energy equipment or research and development activities. Capital gains tax, on the other hand, is a tax on the profits made from the sale of assets such as stocks, bonds or real estate.

Question 8

Investment contributes to economic growth.

Accepted Answer

Investment leads to the creation of new businesses and expansion of existing ones, which in turn creates jobs, increases productivity, and stimulates demand for goods and services. This increases economic activity and ultimately leads to economic growth.

Question 9

Higher interest rates will lead to increased investment.

Accepted Answer

Higher interest rates mean that it is more expensive to borrow money, which can discourage borrowing and decrease investment.

Question 10

Changes in the corporate profits tax rate will shift the investment demand curve.

Accepted Answer

A decrease in the corporate profits tax rate will increase the after-tax return on investment, leading to an increase in investment demand and a shift in the investment demand curve to the right. An increase in the corporate profits tax rate has the opposite effect, decreasing the after-tax return on investment, leading to a decrease in investment demand and a shift in the investment demand curve to the left.

Question 11

Investment will generally lead to an increase in a nation's capacity to produce.

Accepted Answer

Investment in capital goods such as machinery, technology or infrastructure allows a nation to produce goods and services more effectively and efficiently, resulting in an increase in productivity and capacity to produce.

Question 12

Suppose real estate analysts expect that 100,000 homes will be needed in a particular community by 2014. If the current number of homes in the community is only 50,000, we can expect to see a significant increase in the demand for investment.

Accepted Answer

If the expected demand for homes is higher than the current supply, then there will be an increase in demand for investment in the real estate market.

Question 13

Explain the difference between a shift of the investment demand curve and a movement along the investment demand curve. Give one example of what causes a movement along the investment demand curve and one example of what shifts the curve itself.

Accepted Answer

The answer of Explain the difference between a shift of...

Question 14

Net investment adds to the nation's capital stock.

Accepted Answer

Net investment refers to the increase in the capital stock of a nation, thus it adds to the nation's capital stock.

Question 15

For investment to occur, saving must also occur.

Accepted Answer

Investment requires capital, which typically comes from savings. Without savings, there is no pool of capital to use for investments.

Question 16

Higher interest rates increase the opportunity cost of using funds for investment.

Accepted Answer

Higher interest rates mean that the cost of borrowing money increases, leading to a higher opportunity cost of using funds for investment instead of paying off debt. Therefore, investors may opt to defer their investments until interest rates decrease.

Question 17

An important short-run consequence of a lower interest rate is an increase in aggregate demand.

Accepted Answer

When interest rates decrease, people and businesses are more likely to borrow money to make purchases and investments, increasing consumer spending and business investment. This increase in spending and investment leads to an increase in aggregate demand.

Quiz 29: Exchange Rates and International Capital Flows