### Profitability of new investment in plant and equipment

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Suppose that the economy is currently in a recession but 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 for loanable funds, draw a 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 level of saving and investment?

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