2 Refer To The Following Figure Of The Market For Loandable Funds An Investment Tax Credit Encouraged Firms To Invest 1 (97.08 KiB) Viewed 16 times
As a result, the interest rate rises from 5% to 6%, andinvestment increases from $1200 billion to $1400 billion. However,as the interest rate increases, the cost of borrowing funds toinvest increases, and that should imply that investment decreases(people cut down on an activity when it is more costly). How do youreconcile these seemingly contradictory views about the effect ofincreasing interest rates on investment?
2. Refer to the following figure of the market for loandable funds. An investment tax credit encouraged firms to invest more, shifting the demand for loandable funds to the right. Specifically, at each level of interest rate, after the tax credit the firms in the economy want to invest in total $350 billions more. Interest Rate 6% 5% D₁ 1200 1400 1550 S D2 Loanable Funds (in billions of dollars) As a result, interest rate rises from 5% to 6%, and investment increases from $1200 billions to $1400 billions. However, as interest rate increases, the cost of borrowing funds to invest increases, and that should imply that investment decreases (people cut down on an activity when it is more costly). How do you reconcile this seemingly contradictory views about the effect of increasing interest rate on investment?
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