Suppose a New Technology Is Developed That Increases Investment Demand

question 62

Essay

Suppose a new technology is developed that increases investment demand. Holding other factors constant, will the quantity of investment spending increase more in a closed economy or in a comparable small open economy? Explain. Assume that prices are flexible and that factors of production are fully employed in both economies. Assume that there is perfect capital mobility for the small open economy.

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Definitions:

Accrued Interest

Accrued interest is interest that has been incurred but not yet paid, often relating to bonds or loans over the period between interest payment dates.

Equity Method

An accounting method in which the investment in common stock is initially recorded at cost, and the investment account is then adjusted annually to show the investor’s equity in the investee.

Stock Investments

Financial assets representing ownership in a company or corporation, typically traded on stock exchanges.

Debt Investments

Financial assets purchased with the expectation that the original funds will be returned over time with interest, typically including bonds or loans.