Suppose firms expect future output to be higher and future ...

[ishan]

Suppose firms expect future output to be higher and future interest rates to be higher. Given this information, how will firms alter investment in the current period? Explain.
 
  What will be an ideal response?

Question 2

If the expected inflation rate is negative, the expected real interest rate must be
 
  A) negative.
  B) less than the nominal interest rate.
  C) equal to the nominal interest rate.
  D) greater than the nominal interest rate.
  E) none of the above

[canderson530]

Answer to Question 1

The increase in expected future output will cause firms to revise upwards their expectations of future profits. This, all else fixed, will cause an increase in the present value of future expected profits and will tend to increase investment. The increase in the interest rate, however, will tend to decrease investment because it will reduce the discounted present value of future expected profits. The effects, therefore, on investment are ambiguous.

Answer to Question 2

D