Concept explainers
a)
To find: Whether saving rate is equal to investment is true, false or uncertain.
a)
Explanation of Solution
According to Keynes,
At equilibrium
This derivation is done when aggregate demand is equal to
This will be shown in the following expression:
Thus, the statement is true.
b)
To know:Whether higher investment rate can sustain higher growth of output is true, false or uncertain.
b)
Explanation of Solution
The savings rate is equal to investment rate. A higher saving means an economy is not consuming its income but saving it for future. The saving in turns becomes an investment for business. So, higher investment will lead to higher growth of output. But in long run, when economy reaches its steady state, higher investment will not lead to higher growth of output. Instead, more investment will be used to compensate depreciating capital.
Thus, higher investment will cause growth for some time but once it hits its maximum it will no longer be a source of growth.
Thus, the statement is false.
c)
To know:Whether “If capital never depreciated, growth could go on forever” is true, false or uncertain.
c)
Explanation of Solution
Thus, the statement is false.
d)
To find:Whether given statement“The higher saving rate, the higher consumption in steady state” is true, false or uncertain.
d)
Explanation of Solution
To determine whether increasing the savings rate would increase consumption one should know what the golden-rule level of capital is for an economy.
The golden-rule level of capital is the savings rate that is associated with the highest level of consumption in the steady state. If the savings rate is higher than the golden-rule level of capital, then increasing the savings rate would decrease consumption. Conversely, if the savings rate is lower than the golden-rule level of capital, then increasing the savings rate would increase consumption.
Thus, the statement is uncertain.
e)
Whether given statement one should transform Social Security from a pay-as-you-go system to a fully funded system this would increase consumption both now and, in the futureis true, false or uncertain.
e)
Explanation of Solution
Fully funded system is a type of system in which government saves the amount of taxes as social security fund. Taxes are saved to give retirement benefits to the senior citizens. The shift to a fully loaded system decreases saving rate of an economy. This is because in fully loaded system, workers anticipate that after retirement, they will be given more incentives of being senior citizen. While in pay-as-you-go system, government spends the tax collection on current retired people. It implies there is no or less
Thus, the statement is uncertain.
f)
Whether given statement “the U.S. capital stock is far below the golden rule level. The government should give tax breaks for saving because the U.S. capital stock is far below the golden rule level” is true, false or uncertain.
f)
Explanation of Solution
Currently, the country U savings rate is 17%. The savings rate associated with highest level of output is 50%. Almost assuredly if the United States increased its savings rate, consumption would increase as well. If a well-designed tax break increased the savings rate in the United States, consumption would likely increase as well. Thus, the statement is true.
g)
Whether given statement “Education increases human capital and thus output. It follows that governments should subsidize education” is true, false or uncertain.
g)
Explanation of Solution
The evidence is unclear but actually suggests that if most people gained higher education, aggregate output would not increase much. If most people gained higher education, there would be a higher overqualified pool of job applicants and many people would consequently become frustrated. Although subsidizing education is uncertain, it likely should not be undertaken.
Thus, the statement is uncertain.
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Chapter 11 Solutions
Macroeconomics, Student Value Edition Plus MyLab Economics with Pearson eText -- Access Card Package (7th Edition)
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