Assume that a nation has an output level of 250 units per year and that consumption is also 250. Suppose there is a sudden temporary drop in GDP by 18%. What does the long-run consumption path look like if this country has access to global financial markets with an interest rate of 7%?
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- After the global financial crisis, there has been a heated debate about whether the sluggish recovery in advanced economies reflects the secular stagnation or a slowing trend under debt overhang. Advocates of secular stagnation argue that tepid investment spending along with subdued consumption by households would result in persistent output gap and slow growth for many years to come. Also, the resulting excess of global savings over global investment in turn would put the real interest rate on a downward path. There are several explanations for this secular stagnation hypothesis. Which of the following cannot be viewed as such explanation?a. Decline in investment rates due to a dearth of profitable investment opportunitiesb. Decline in the relative price of investment goods – hence the same investment projects can be pursued by committing a smaller share of GDP, which results in a lower amount of investment in total.c. Decline in population growth rate means capital has less…Differentiate between the following terms. Stock variable and flow variable.Assumptions in AD/AS models and assumptions in Keynesian models. Absolute advantage and comparative advantage. Nationalisation and privatisation. Expansionary fiscal policy and expansionary monetaryAssume that the United States economy is currently in a recession in a short-run equilibrium. When interest rates fall, what is the impact on each of the following? (i) Investment (ii) Economic growth rate. Explain
- Explain two of the channels through which lower interest rates stimulate consumption by households.Consider a closed-economy. The economywide expected future marginal product of capital is MPKf = 50 − 0.05K^f , where Kf is the future capital stock. The depreciation rate of capital, δ, is 10% per period. The current capital stock, K, is 900 units of capital. The real price of a unit of capital is 8 unit of output. Firms pay taxes equal to 20% of their output. The consumption equation is C = 100 + 0.6Y −100r, where C is consumption, Y is output, and r is the real interest rate. Government spending equals 150 and full-employment output is 1000. (a) Suppose the current real interest rate is 10% per period. What are the values of the tax-adjusted user cost of capital, the desired future capital stock, and the desired level of investment? (b) When the real interest rate equals 10%, what are the desired levels of consumption and saving (assuming output is at the full-employment level)? 10 (c) Is the goods market in equilibrium when the real interest rate equals 10%? Provide an intuitive…The economy begins in equilibrium at point E, representing the real interest rate r1 at which saving S1 equals desired investment I1. What will be the new equilibrium combination of real interest rate, saving, and investment if the government cuts spending, holding other factors constant? options: point A point B point C point D
- Suppose the current level of output and the interest rate are such that the economy is operating on neither the IS nor LM curve. Which of the following is true for this economy? A) Production does not equal demand. B) The money supply does not equal money demand. C) The quantity supplied of bonds does not equal the quantity demanded of bonds. D) Financial markets are not in equilibrium. E) all of the aboveWhen long-term interest rates rise, consumption expenditure and investment _______ and aggregate demand _______. A. decrease the same day; decreases a year later B. decrease a year later; decreases a year later C. increase a year later; increases a year later D. decrease about two years later; decreases about two years later thanks !!! zInvestment spending in macroeconomics refers to: adding to productive capital and changes to inventory. adding to one's retirement account. buying stocks. buying newly issued shares of stock.
- Suppose that an economy is operating at equilibrium and for some reason households begin to save a smaller fraction of their income. How will this affect equilibrium output in the future when planned investment rises and falls?Suppose the desired consumption function of Canadaland is given by C^d= 0.5 + 0.7Y - 10r - 0.1G, where Y is income, r is the real interest rate, and G is government purchases. This implies that a. Desired consumption is increasing in the real interest rate b. The marginal propensity to consume is 0.5 c. The marginal propensity to consume is 0.75 d. Desired consumption is increasing in governmental purchasesWhen long-term interest rates rise, consumption expenditure and investment _______ and aggregate demand _______. A. decrease the same day; decreases a year later B. decrease a year later; decreases a year later C. increase a year later; increases a year later D. decrease about two years later; decreases about two years later thank you!!
