Question

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

Answer 1

If we talk about firms expectation in interest rates to be lowered they will alter investment as-

• When firms expect future Interest rates to be lowered then firms will increase its spending investment in current period as it will boost the economy as firms will earn more

If we talk about firms expectation in output to be lowered in future they will alter investment as -

• When firm expect future output to be lowered then firms will decrease its investment in current period so that it will not have to face the losses when the output will decrease in future