Consider an economy initially in equilibrium in the goods market. It becomes known that future Total Factor Productivity , A^f , will decline next period, but is expected to return to its normal level in the subsequent period.
Which of the following statements is correct?

Question

Consider an economy initially in equilibrium in the goods market. It becomes known that future Total Factor Productivity ,    A^f  , will decline next period, but is expected to return to its normal level in the subsequent period.  
 Which of the following statements is correct?

Answer

The Investment curve shifts to the left, the saving curve shifts to the right. In equilibrium, saving,  investment, and the interest rate could decrease or increase.

Answer

In the new equilibrium, both investment and saving must decline.

Answer

News about future TFP does not affect current demand for investment.

Answer

The interest rate must decline.

Crowdly

Consider an economy initially in equilibrium in the goods market. It becomes kno...

Want instant access to all verified answers on learning.monash.edu?