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Chapter 21: Q4 (page 566)

During and in the aftermath of the financial crisis of 2007–2009, planned investment fell substantially despite significant decreases in the real interest rate.

What factors related to the planned investment function could explain this?

Short Answer

Expert verified

Decrease in Marginal Productivity of capital, Expected profit can lead to fall in investment despite of decrease in interest rate.

Step by step solution

01

Investment Function Basics 

As per classical economists, specially Keynes -

There are three factors effecting Business Investment - Cost (ie Interest), Return determined by Marginal Efficiency (ie Marginal Productivity) of capital, Expectations

02

Detail Explanation 

If Interest rate has fallen, investment expenditure can still decrease due to unfavourable decline other factors - ie Marginal Efficiency (yield) of capital, Expectations

It leads to decrease & leftward shift of inverse investment curve / function, ie primarily dependent on interest.

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Most popular questions from this chapter

The fiscal stimulus package of 2009 caused the IS curve to shift to the left, since output decreased and unemployment increased after the policies were implemented.” Is this statement true, false, or uncertain? Explain your answer.

Suppose you read that prospects for stronger future economic growth have led the dollar to strengthen and stock prices to increase.

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