Suppose that businesses in Japan reduce their spending on plant ...

[dmcintosh]

Suppose that businesses in Japan reduce their spending on plant and equipment. What will be the effect on spending on plant and equipment by businesses in the United States?
 
  What will be an ideal response?

Question 2

In the DMP model, a decrease in matching efficiency
 
  A) has no effect on vacancies.
  B) reduces the unemployment rate.
  C) increases labor market tightness.
  D) increases the size of the labor force.

[Swizqar]

Answer to Question 1

Because Japan is a large open economy, the decrease in the demand for loanable funds in Japan will lower the world real interest rate. At a lower real interest rate, businesses in the United States will increase their spending on plant and equipment. Note that this answer ignores the potentially offsetting effect operating through the impact of lower spending on plant and equipment in Japan on Japanese national income and on Japanese demand for goods and services produced in the United States.

Answer to Question 2

D

[dmcintosh]

Thank you

[Swizqar]

Happy to help you