The figure below depicts the aggregate investment function of an economy. Based on this information, which of the following statement is correct? Select the two correct answersGroup of answer choicesCeteris paribus, an increase in the interest rate would lead to a fall in investment due to an inward shift of the investment line.A rise in corporate tax would make the investment line flatterA flatter line indicates the higher sensitivity of the level of aggregate investment to changes in interest rate.A forecast of a permanent demand increase shifts the investment line outwards
Question
The figure below depicts the aggregate investment function of an economy. Based on this information, which of the following statement is correct? Select the two correct answersGroup of answer choicesCeteris paribus, an increase in the interest rate would lead to a fall in investment due to an inward shift of the investment line.A rise in corporate tax would make the investment line flatterA flatter line indicates the higher sensitivity of the level of aggregate investment to changes in interest rate.A forecast of a permanent demand increase shifts the investment line outwards
Solution
Without the figure, it's hard to provide a definitive answer. However, based on general economic principles:
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"Ceteris paribus, an increase in the interest rate would lead to a fall in investment due to an inward shift of the investment line." - This statement is generally correct. Higher interest rates increase the cost of borrowing, which can deter investment. Therefore, the investment line would shift inward.
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"A rise in corporate tax would make the investment line flatter" - This statement could be correct or incorrect depending on the specific circumstances. A rise in corporate tax could deter investment, which would make the investment line flatter. However, it could also have no effect or even make the line steeper if the tax increase is offset by other factors.
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"A flatter line indicates the higher sensitivity of the level of aggregate investment to changes in interest rate." - This statement is generally correct. A flatter line indicates that a small change in the interest rate leads to a large change in investment, which means that investment is highly sensitive to changes in the interest rate.
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"A forecast of a permanent demand increase shifts the investment line outwards" - This statement is generally correct. If businesses expect demand to increase permanently, they are likely to invest more in order to meet this demand, which would shift the investment line outward.
Similar Questions
Which of the following is consistent with a shift in the investment demand line as depicted below? (There are multiple correct responses; select all that apply.)Group of answer choicesA stock market boomAn increase in the depreciation rateWidespread business pessimism due to a global pandemicHigher real interest ratesSignificant inflation that raises the price (cost) of acquiring physical capital, such as a "machine"An investment tax credit for firms undertaking investments in renewable energies
An increase in the interest rate __________________.a.Shifts the aggregate demand curve to the leftb.Shifts the aggregate demand curve to the rightc.Has no effectd.Moves the economy along the aggregate demand curveClear my choice
An increase in the aggregate price level will cause:Question 6Select one:a.an ambiguous effect on investment.b.an increase in the interest rate and an upward shift in the LM curve.c.an increase in investment and an increase in output .d.a reduction in the interest rate and a rightward shift in the IS curve.
A flatter IS curve would necessarily result fromGroup of answer choicesa lower marginal tax rate and a higher interest elasticity of investmenta higher interest elasticity of investment and a flatter planned aggregate expenditure functiona higher marginal propensity to consume and a lower interest sensitivity of investmenta lower interest elasticity of investment and an unchanged planned aggregate expenditure function.
Which of the following will result in a rightward shift of the aggregate demand curve?Multiple select question.A decrease in wages and other input pricesAn increase in consumption spendingAn increase in investmentA decrease in the price of valuable commoditiesAn increase in business taxes
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