Author Question: Which of the following will occur when the capital stock falls? A) profit per unit of capital ... (Read 78 times)

MirandaLo · **on:** Jun 30, 2018

Which of the following will occur when the capital stock falls?

A) profit per unit of capital will increase
B) profit per unit of capital will decrease
C) there will be no change in profit per unit of capital
D) there will be an ambiguous effect on profit per unit of capital
E) none of the above

Question 2

Use the IS-LM model to answer this question. Suppose there is a simultaneous increase in taxes and reduction in the money supply. Explain what effect this particular policy mix will have on output and the interest rate. Based on your analysis, do we know with certainty what effect this policy mix will have on investment? Explain.

What will be an ideal response?

chereeb · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

A

Answer to Question 2

In this case, the LM curve shifts up and the IS curve shifts to the left. In this case, output will clearly fall. What happens to the interest rate depends on the relative magnitude of the two policies. The effects on I are again ambiguous.