EBK ECONOMICS TODAY
18th Edition
ISBN: 9780100663336
Author: Miller
Publisher: YUZU
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Question
Chapter 12, Problem bFCT
To determine
The reasons because of which the desirable flow of real investment is considered to be more sensitive to an increase of one-half percentage point increase are to be determined.
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Consider the following functions for consumption and investment: C = 1,000 + (2/3)*(Y – T) and I = 1,200 – 100*r. Furthermore, Y = 8,000, G = 2500, T = 2,000.
Compute private, public, and national savings for this economy, and find the equilibrium real interest rate (r).
Assume that G declines by 500 units. How will it change your answers in part (a)?
What happens to the national savings, given everything else, if the public decides to consume less out of their disposable income (assume that the propensity of consume falls by 10 percent)?
Given your answer in part (c), what happens to investment and real interest rate?
Answer all four.
22. What could have caused the Investment function to move from I1 to I2?
23. Assuming that the Investment function moves from I1 to I2, and assuming the market rate of interest in at 15%, by how much would investment spending decrease?
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 purchases
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- Suppose that the government creates a disincentive for private saving by increasing the tax that people pay on income from holding stocks and bonds. Construct a well-labeled diagram that depicts the effect of the policy change on the real interest rate and the equilibrium quantity of investment.arrow_forwardSuppose that the Federal funds rate rose from 3% to 6% during the year. What would you expect to happen to the rate of growth in real consumption, and in the consumption/income ratio, under the following circumstances? (A) The corporate bond rate rose from 6% to 9%. (B) The corporate bond rate remained unchanged at 6%. (C) The stock market declined 20%. (D) The stock market was unchanged. (E) The unemployment rate rose from 5% to 6%. (F) The unemployment rate was unchanged.arrow_forwardAssume an economy with 1000 consumers. Each consumer has income in the current period of 50 units and future income of 60 units, and pays a lump-sum tax of 10 in the current period and 20 in the future period. The market real interest rate is 8%. Of the 1000 consumers, 500 consume 60 units in the future, while 500 consume 20 units in the future. Determine each consumer’s current consumption and current saving. Current Consumption: Current Saving: Determine aggregate private saving, aggregate consumption in each period, government spending in the current and future periods, the current-period government deficit, and the quantity of debt issued by the government in the current period. Aggregate Private Saving Aggregate Consumption Government spending: Current Future Current period government deficit Quantity of debtarrow_forward
- Graphically illustrate and explain - what happens to consumer spending when consumers become more optimistic about the future, i.e., consumer expectations rise - how an increase in the interest rate would affect consumer spending - what happens to consumer spending in response to an increase in consumer incomearrow_forwardWhy will a reduction in the real interest rate increase investment spending, other things equal? Why is investment spending unstable?arrow_forwardAssume that Andrew Marcus is 25 years old and expects to live until the age of 75. (a) If he wins €20 million in cash (after taxes) in the lottery and retires, how much will he consume each year if he wants to have constant consumption and use up all his wealth by the time he dies? Assume the real interest rate is zero. (75 words max) (b) If his total income in the year he wins the lottery is his lottery winnings, what will his average propensity to consume be for that year? (75 words max) (c) If he has no other earnings in later years but continues his constant consumption, what will his average propensity to consume be for those later years? (75 words max) (d) What is Andrew's "permanent income" in the year he wins the lottery? What is his "transitory income"? (75 words max)arrow_forward
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