When drawn against the real interest rate,the output demand curve shifts to the right when
A) current total factor productivity z increases.
B) current total factor productivity z decreases.
C) future total factor productivity z' increases.
D) future total factor productivity z' decreases.

Question

Quizplus · Accepted Answer

An increase in future total factor productivity (z') increases the expected return on an investment in physical capital, which reduces the real interest rate. This leads to an increase in investment demand, and therefore, the output demand curve shifts to the right. On the other hand, a decrease in future total factor productivity (z') increases the real interest rate, leading to a decrease in investment demand, and therefore, the output demand curve shifts to the left. Current total factor productivity (z) does not have a direct impact on investment demand or the output demand curve.

When Drawn Against the Real Interest Rate,the Output Demand Curve