Recent concerns about global warming have lead firms to expect a higher depreciation of their capital in the future and households to expect lower levels of future income.
Explain, with the help of a graph, what happens to a firm’s desired level of future capital for any given level of the expected real interest rate.
Explain, with the help of a graph, what happens to the desired level of investment for any given level of the expected real interest rate and to the desired investment curve.
Explain what happens to households’ optimal level of current and future consumption and savings everything else constant.
Explain, with the help of a graph, what happens to the desired savings curve.
Assume that the goods and services market is initially in equilibrium. Explain, with the help of a graph, what happens to the equilibrium real interest rate, level of savings and investment. Discuss all possibilities.