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Exhibit: Saving, Investment, and the Interest Rate 2
-(Exhibit: Saving, Investment, and the Interest Rate 2) The economy begins in equilibrium at Point E, representing the real interest rate, r₁, at which saving, S₁, equals desired investment, I₁. What will be the new equilibrium combination of real interest rate, saving, and investment if there is a technological innovation that increases the demand for investment goods?

Question

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Exhibit: Saving, Investment, and the Interest Rate 2

-(Exhibit: Saving, Investment, and the Interest Rate 2) The economy begins in equilibrium at Point E, representing the real interest rate, r₁, at which saving, S₁, equals desired investment, I₁. What will be the new equilibrium combination of real interest rate, saving, and investment if there is a technological innovation that increases the demand for investment goods?

Quizplus · Accepted Answer

A technological innovation that increases the demand for investment goods will shift the investment curve to the right, resulting in a new equilibrium at a higher real interest rate, and higher levels of saving and investment. This is represented by Point B on the exhibit.

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