644-Q5

Suppose that the economy of currently in a recession and that economic forecasts indicate that the economy will soon enter an expansion.

• What is the likely effect of the expansion on the expected profitability of new investment in plant and equipment?
• In the market of loanable funds, graph and explain the effect of the forecast of an economic expansion, assuming that borrowers and lenders believe the forecast is accurate.
• What happens to the equilibrium real interest rate and the quantity of loanable funds?
• What happens to the quantity of saving and investment?