Explain how a decrease in the interest rate will affect investment. ...

[Answer to ques. #1]  The interest rate is the cost of borrowing investment funds. When the interest rate decreases, then the cost of borrowing falls, and so firms find it profitable to undertake additional investments. Therefore, we find an inverse relationship between the interest rate and investment spending.

[Answer to ques. #2]  c

[Answer to ques. #3]  c

[Answer to ques. #4]  An increase in wealth increases consumption at each level of disposable income (shifts the consumption curve upward). A rise in the price level reduces the real value of assets. This reduction in wealth reduces consumption at each level of income (shifts the consumption curve downward). An increase in interest rates the reward for saving and discourages borrowers from securing current spending power. An increase in interest rates, therefore, will shift the consumption curve downward. A rise in price expectations may encourage more households to buy now to beat the expected price increase regardless of their current disposable income (shifts the consumption curve upward).

[Answer to ques. #5]  Crowding out refers to government deficit spending financed by borrowing that increases interest rates and thereby reduces private borrowing and spending. The crowding out effect probably exists, but to what extent is debatable. If deficit spending is used to increase our nation's production possibilities through public investment in infrastructure, then the crowding out effect is reduced. However, history shows that rarely is there a significant amount of any deficit allocated toward productive-enhancing public investment infrastructure. The extent of a crowding-out effect is important because any crowding out renders fiscal policy less effective in stimulating the economy during a recession.

[Answer to ques. #6]  d

[Answer to ques. #7]  The marginal propensity to consume is the change in consumption divided by the change in disposable income. The marginal propensity to save is the change in saving divided by the change in disposable income. The MPC measures the slope of the consumption function and is constant along a linear consumption function.