Irrational exuberance by firms in Hamsterville has lead to an increase in investment in capital. Most firms in Hamsterville borrow to pay for investment in plant and equipment.

What effect does this have on real interest rates, exports, and long-run aggregate supply?

Choose 1 answer:
(A) Real interest rates increase, exports decrease, and long-run aggregate supply increases.
(B) Real interest rates increase, exports decrease, and long-run aggregate supply decreases.
(c) Real interest rates increase, exports increase, and long-run aggregate supply decreases.
(D) Real interest rates decrease, exports increase, and long-run aggregate supply isn't affected.
(E) Real interest rates decrease, exports decrease, and long-run aggregate supply isn't affected.

Question

Irrational exuberance by firms in Hamsterville has lead to an increase in investment in capital. Most firms in Hamsterville borrow to pay for investment in plant and equipment.

What effect does this have on real interest rates, exports, and long-run aggregate supply?

Choose 1 answer:
(A) Real interest rates increase, exports decrease, and long-run aggregate supply increases.
(B) Real interest rates increase, exports decrease, and long-run aggregate supply decreases.
(c) Real interest rates increase, exports increase, and long-run aggregate supply decreases.
(D) Real interest rates decrease, exports increase, and long-run aggregate supply isn't affected.
(E) Real interest rates decrease, exports decrease, and long-run aggregate supply isn't affected.

Accepted Answer

∻Solution by Steps∻ ‖ step 1 ⋮ Consider the effect of increased investment in capital on real interest rates. Increased borrowing by firms to finance investment can lead to higher demand for loanable funds. ‖ ‖ step 2 ⋮ According to the loanable funds theory, an increase in demand for loanable funds, with supply remaining constant, leads to an increase in real interest rates. ‖ ‖ step 3 ⋮ Analyze the effect on exports. Higher real interest rates can lead to currency appreciation, making exports more expensive and potentially decreasing them. ‖ ‖ step 4 ⋮ Evaluate the effect on long-run aggregate supply (LRAS). Increased investment in capital expands productive capacity, leading to an increase in LRAS. ‖ ∻Answer∻ ***A*** ∻Key Concept∻ ⚹Loanable Funds Theory⚹ ∻Explanation∻ ⚹Increased demand for loanable funds leads to higher real interest rates, which can appreciate the currency and decrease exports, while investment in capital increases long-run aggregate supply.⚹◊What statistical analysis can be performed to determine the most likely combination of effects on real interest rates, exports, and long-run aggregate supply based on the answer choices provided?⍭ Generate me a similar question◊

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