The planned investment function will shift upward if
A) real disposable income decreases.
B) the interest rate rises.
C) business expectations become more optimistic.
D) the existing stock of capital falls.

Question

Quizplus · Accepted Answer

When business expectations become more optimistic, firms are more likely to invest in new projects and expand their output. This leads to an increase in the planned investment function, as firms are willing to invest more at a given level of real interest rates and income. Option A is incorrect because a decrease in real disposable income would likely lead to a decrease in the planned investment function, as firms would have less funds available to invest. Option B is incorrect because an increase in the interest rate would likely lead to a decrease in the planned investment function, as borrowing costs would be higher. Option D is incorrect because a decrease in the stock of capital would likely lead to a decrease in the planned investment function, as firms would have less productive capacity to produce output.

The Planned Investment Function Will Shift Upward If