Knowledge that Transforms

AS is well known, economic theory indicates that, in general, the interest rate will, ceteris paribus, have a greater effect upon longterm than upon short-term investment.' The purpose of this paper is to present a statistical test of this hypothesis. If this hypothesis is correct, we should expect that during periods when the interest rate fell that longer-term investment would tend to increase more rapidly (or decrease more slowly) than shorter-term investment, and conversely. On the average, investment by producers in construction represents a longer-term investment than investment in producers durables. In turn investment in producers durables is, on the average, of longer-term than investment in inventory. In addition, investment in residential construction is, on the average, of longer term than investment in consumers durables. The investment data for the economy as a whole can be conveniently contained within two fractions:

Wassily W. Leontief, Factor Proportions and the Structure of American Trade: Further Theoretical and Empirical Analysis: Reply, The Review of Economics and Statistics, Vol. 40, No. 1, Part 2. Problems in International Economics (Feb., 1958), pp. 119-122

Fritz Machlup, Strategic Factors in Balance of Payments Adjustment: Comment, The Review of Economics and Statistics, Vol. 40, No. 1, Part 2. Problems in International Economics (Feb., 1958), pp. 137-140

foreign supply curve AC and demand curve JM are unaffected by devaluation, while, upon devaluation to the extent indicated by AB(=JK), the home supply curve in terms of foreign currency shifts downward from its initial position (not drawn), passing through J, to KM, and the home demand curve in terms of foreign currency shifts downward from its initial position (not drawn), passing through A, to BC. Thus M is the new equilibrium position in the export market, and C that in the