Microeconomics A Contemporary Intro
10th Edition
ISBN: 9781285635101
Author: MCEACHERN
Publisher: Cengage
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5.
The government of an economy has increased its spending and its taxes by the same amount.
i) What is the effect on investment? Use loanable funds market framework to illustrate your answer graphically and explain in words.
ii) Does higher marginal propensity to consume amplify this effect or not? Explain your answer analytically. 2nd time submitting as a post, please answer this problem fully and explain work. Please answer graphically and use words as prescribed
Please explain results fully. Use graph please as well. The first time I submitted this I was given a partial answer that I believe to be inaccurate for merely half the problem and that used no graph.
Macmillan macroeconomics textbook is a good reference.
National Income: Where It Comes From and Where It Goes — End of Chapter Problem
If consumption depends on the interest rate, saving will also depend on it. In particular, the higher the interest rate, the greater will be the return to saving. Hence, the supply of loanable funds will be represented by an upward-sloping, rather than a vertical, curve.
National saving is the sum of public saving and private saving. Investment in this analysis is private investment. It does not include public investment.
(A) Suppose that in a closed economy GDP is equal to 15,000, taxes are equal to 2,000, Consumption equals 9,000, and government expenditures equal 4,000. What are private saving and public saving?
a. 4000 and –2000
b. 4000 and 2000
c. 2000 and –2000
d. 2000 and 3000
(B) A lower interest rate induces people to
a. save less, so the demand for loanable funds slopes upward.
b. save less, so the demand for loanable funds slopes downward.
c. invest more, so the demand for loanable funds slopes upward.
d. invest more, so the demand for loanable funds slopes downward.
(C) Alex puts $300 into an account when the interest rate is 5 percent. Later he checks his balance and finds he has about $330,75. How long did Alex wait to check his balance?
a. 2
b. 2.5
c. 3
d. 4.5
Knowledge Booster
Similar questions
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- Use the analysis for the market for loanable funds diagram to illustrate and explain how thefollowing government policy affect the economy’s saving and investment. Policy 1: Suppose thegovernment changes the tax code, allowing individuals to reduce their taxable income if they savemoney in registered retirement savings plans (RRSPs). Your response should answer the following questions:a. State and explain which loanable funds curve would this policy affect? b. Which way would the loanable funds curve shift? c. What would be the impact on interest rates? Draw the loanable funds diagram to illustrate your answers for a to c.arrow_forwardUse the analysis for the market for loanable funds diagram to illustrate and explain how thefollowing government policy affect the economy’s saving and investment. Policy 1: Suppose the government changes the tax code, allowing individuals to reduce their taxable income if they save money in registered retirement savings plans (RRSPs). Your response should answer the following questions: a. State and explain which loanable funds curve would this policy affect? b. Which way would the loanable funds curve shift? c. What would be the impact on interest rates? Draw the loanable funds diagram to illustrate your answers for a to c.arrow_forward17) Assume that a national restaurant firm called BBQ builds 10 new restaurants at a cost of $1 million per restaurant. It outfits each restaurant with an additional $200,000 of equipment and furnishings. To help partially defray the cost of this expansion, BBQ issues and sells 200,000 shares of stock at $30 per share. Instructions: Enter your answers as whole numbers. a. What is the amount of economic investment that has resulted from BBQ’s actions? b. How much purely financial investment took place?arrow_forward
- Construct the market for loanable funds and use it to illustrate and explain each of the following:a) How an increase in the government budget deficit will affect equilibrium interest rate and investment spending of firms, other factors constantb) How an increase in household savings as they become more financial literate will affect equilibrium interest rate and investment spending of firms, other factors constantc) How an increase in business confidence will affect equilibrium interest rate and investment spending of firms, other factors constant.arrow_forwardProblem Set 4: Saving and Investment Economists in Fantasialand, a closed economy, have collected the following information about the economy for a particular year: Y = 9000; C = 6000; T = 1500; G = 1700. The economists also estimate that the investment function is: I = 3300 - 100r, where r is the country’s real interest rate, expressed as a percentage (i.e. r = 1 means interest rate is one percent). Calculate private saving, public saving, national saving, investment, and the equilibrium real interest rate.arrow_forwardIf the economy is in recession and government increases money supply do you think it will affect product market? How it will affect i. the price level and value of money, ii. Loanable fund market: expected inflation and real GDP? Use the relevant diagrams.arrow_forward
- Suppose the government borrows $20 billion more next year than this year,a. Use a supply-and-demand diagram to analyze this policy. Does the interest rate rise or fall?b. What happens to investment? To private saving? To public saving? To national saving? Compare the size of the changes to the $20 billion of extra government borrowing.c. How does the elasticity of supply of loanable funds affect the size of these changes?d. How does the elasticity of demand for loanable funds affect the size of these changes?e. Suppose households believe that greater government borrowing today implies higher taxes to pay off the government debt in the future. What does this belief do to private saving and the supply of loanable funds today? Does it increase or decrease the effects you discussed in parts (a) and (b)?arrow_forward22. Assume the US is operating in a closed economy and GDP is $20 trillion, consumption is $8 trillion, government spending is $10 trillion, and there is a balanced budget. a. Write the equation for public saving. Solve for public saving in this economy. b. Solve for net taxes c. Write the equation for private saving. Solve for private saving in this economy.arrow_forwardSuppose the economy is closed and consumption of $10,000, taxes are $2000 and government purchases are $3,000 and national saving is $1,500. (Given GDP=$14500, Public saving= -$1000, Private saving=$2500, Investment=$1500). So In the era of covid-19 pandemic, the producers were pessimistic about the returns of capital and reduced their investments. Use a well-labelled diagram of loanable funds market to illustrate and explain the impacts on the equilibrium interest rate and quantity of loanable funds.arrow_forward
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