Use the model developed in Chapter 3, but assume that consumption decreases, other things being equal, when the interest rate rises. If there is a technological advance that leads to an increase in investment demand:
A) investment increases and the interest rate rises.
B) investment is unchanged and the interest rate rises.
C) investment and the interest rate are both unchanged.
D) investment decreases and the interest rate rises.

Question

Quizplus · Accepted Answer

If consumption decreases with a rise in interest rates, then the aggregate demand curve will shift leftward, leading to a fall in output/income and employment. As a result, investment demand would have to increase to restore equilibrium. The increase in investment demand would lead to an increase in the interest rate and a further reduction in consumption. Hence, investment increases and the interest rate rises.

Use the Model Developed in Chapter 3, but Assume That