Use the following to answer question 3.

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,
𝑟
1
, at which saving,
𝑆
1
, equals desired investment,
𝐼
1
. 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

Use the following to answer question 3.

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, 
𝑟
1
 , at which saving, 
𝑆
1
 , equals desired investment, 
𝐼
1
 . 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?

BlackTom AI · Accepted Answer

The question asks about the new equilibrium when there is a technological innovation that increases the demand for investment goods, given the saving–investment diagram in the exhibit.

Option A: Point A. This point lies on the original investment demand I1 and the saving schedule S1, representing the initial equilibrium before any shift. If investment demand increases due to technology, we would not stay at the old intersection; thus A cannot be the new equilibrium.

Option B: Point B. This point appears higher up along the vertical saving axis, corresponding to a larger level of saving associated with a higher r, but it does not align with the shifted investment-demand curve to the right. Since the investment demand has shifted to the right, the new intersection should occur where the new I2 curve meets the saving schedule, not at B.

Option C: Point C. This point is located at a lower interest rate (r3) with a dotted vertical line to a lower saving level, indicating a move inconsistent with an outward shift of investment demand. An increase in investment demand typically raises the real interest rate in this framework, so C is not the new equilibrium.

Option D: Point D. This is the intersection of the new investment-demand curve I2 (shifted right/up) with the existing saving schedule, locating at the higher investment level and at the corresponding higher/altered rate consistent with the shifted demand. It captures the economy’s adjustment to a technology-driven increase in investment demand, yielding a new equilibrium combination of r, saving, and investment that lies along I2 and the saving line. In other words, the rightward shift in investment demand moves the equilibrium from the initial E to D, consistent with standard saving–investment adjustment.

In summary, the technology-induced increase in investment demand shifts the investment curve to the right, and the new market-clearing point where this new demand curve meets the saving schedule is Point D. The other points represent configurations that do not reflect the rightward shift of investment demand and therefore do not describe the new equilibrium.

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