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Holding other things constant, the desired level of the capital stock will increase unam biguously if A) real interest rate decreases and effective tax rate increases
Holding other things constant, the desired level of the capital stock will increase unam biguously if A) real interest rate decreases and effective tax rate increases. B) price of capital decreases and depreciation rate of capital increases. C) price of capital increases and effective tax rate decreases. D) expected future marginal product of capital increases and real interest rate decreases.
6. If consumers face binding borrowing constraints which prevent them from borrowing as much as they would like today (i.e., they want to consume more today than they are able to), a reduction in taxes today that is accompanied by an offsetting increase in future taxes is most likely to cause A) a rightward shift in the saving curve and a rightward shift in the investment curve. B) a leftward shift in the saving curve, but no shift in the investment curve. C) a shift in neither the saving nor the investment curve. D) no shift in the saving curve, but a rightward shift in the investment curve.
Expert Solution
The rate of capital formation depends upon the level of investment. The desired level of investment in turn depends upon the expected rate of return from the capital investment. If the investors expect a high return from the capital investment due to an expected increases in future productivity of capital, then the level of investment and the level of capital stock increase.
A fall in real interest rate increases the return on every additional investment which will increase the capital formation and stock of capital through an increased investment.
d. expected future marginal product of capital increases and real interest rate decreases.
6. An increased consumption today reduces the level of saving. When a reduction in taxes today is offset by an increase in future tax the level of saving decreases. This will shift the saving curve to the left but no shift in investment curve.
B. a leftward shift in saving curve, but no shift in the investment curve.
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