(a)
To explain:
Whether an increase in the interest rate will cause decrease in consumption.
Answer to Problem 1P
The increase in interest rate will decrease the consumption power in the economy.
Explanation of Solution
An increase in the interest rate increases the monthly payments made to buy automobiles, furniture as the consumer has to pay high instalment for goods bought on credit. As the disposable income of an individual remains the same and the interest rate is high, it leads to reduction in the consumption of goods and services.
Consumption:
It refers to the goods and services that are consumed by the people in an economy.
Interest rate:
It is the rate at which the principal amount is charged for a specific time period. An amount is charged at this rate from the lender for the use of assets.
(b)
To explain:
Whether an increase in the value of stock market portfolio will cause decrease in consumption.
Answer to Problem 1P
An increase in the value of the stock market of the portfolio, will increase the consumption.
Explanation of Solution
The change in the consumption is shown below:
In the above figure,x-axis represents disposable income while the y-axis represents the consumption expenditure. The larger the amount of real wealth (including stock portfolio, property) larger will be the consumption power.
Consumption:
It refers to the goods and services that are consumed by people in the economy.
Stock market portfolio:
It refers to the numberof financial assets that is kept by an investor in the form of bonds, commodities, and mutual funds.
(c)
To explain:
Whether a decrease in disposable income will cause decrease in consumption.
Answer to Problem 1P
The reduction in disposable income will decrease the consumption.
Explanation of Solution
The decrease in disposable income will lead to decrease in consumption, as it is the remaining amount after filling income tax that can be used by an individual for consuming goods and services. If the disposable income decreases, it will have a direct impact on the consumption power of an individual.
Consumption:
It refers to the goods and services that are consumed by people in the economy.
Disposable income:
It refers to that amount of income which is available in the household for savings as well as spending after income taxes.
(d)
To explain:
Whether an increase in income taxes will cause decrease in consumption.
Answer to Problem 1P
An increase in income taxes will decrease consumption.
Explanation of Solution
An increase in income taxes will decrease the amount of income left for consumption. As less amount is left with an individual, it will decrease the spending.
Consumption:
It refers to the goods and services that are consumed by people in the economy.
Income Tax:
It refers to the tax levied by the government of a country on an individual's business. It acts as a source of revenue for the government. This amount is used in providing facilities to the citizens of the country.
(e)
To explain:
Whether deflation will cause decrease in consumption.
Answer to Problem 1P
The deflation will cause an increase in consumption.
Explanation of Solution
The disposable income of a household remains the same but due to deflation, it will increase the value of the currency, which will, in turn, lead to an increase in the
Consumption:
It refers to the goods and services that are consumed by people in the economy.
Deflation:
It refers to the fall in the prices of goods and services in an economy due to fall in inflation. The deflation leads to an increase in the purchasing power of the currency.
Want to see more full solutions like this?
- Please help with the following economic question : Explain the relationship between Investment spending and the interest rate.arrow_forwardAt any given amount of income, an increase in consumption will result in a. A rise in total demand b. A boost in exports c. Decrease in tax revenue d. A reduction in the amount of money spent on importsarrow_forwardHow does the increase in interest rates raise the chances of a recession? How can we expect the increase in interest rates to affect the consumption of the poorest 20% and richest 20% of households?arrow_forward
- Is the purchase of equipment or machinery a part of consumption or investment?arrow_forwardThe most likely source of an increase in investment is a. Interest rates that are lower b. Expected increases in national income c. The marginal propensity to consume is decreasing d.arrow_forwardExplain how each of the following will affect the consumption and saving schedules (as they relate to GDP) or the investment schedule, other things equal:a. A large increase in the value of real estate, including private houses.arrow_forward
- Explain the relationship between output and income for both an individual and an entire economy.arrow_forwardWho gave the theory of consumption?arrow_forwardExplain what happens to consumption, investment, and the interest rate when the government increases taxes. Show graphically the effect of increased taxes when saving is not dependent on interest rate.arrow_forward
- Which of the following is most likely to cause a rightward shift of the investment demand curve? a. An increase in the market rate of interest b. An increase in income O c. A decrease in the market interest rate d. An improvement in business expectations e. A decrease in incomearrow_forwardWhich of the following can cause planned investment by firms to increase? a. To reduce constant budget deficits, the government announces plans to increase the corporate tax rate. b. An increase in the interest rate due to an increase in the cost of making financial transactions. c. Firms become optimistic about economic conditions after seeing reports of strong growth in consumer spending. d. A major recession has reduced consumption spending, hurting profit levels for high-end car manufacturers.arrow_forwardWhich of the following is an example of an investment expenditure? A Steve purchases a new power washer for his gutter cleaning business. B Margaret buys a new home. C A florist installs new energy efficient refrigerators. D All of these are examples of investment spending.arrow_forward
- Exploring EconomicsEconomicsISBN:9781544336329Author:Robert L. SextonPublisher:SAGE Publications, IncEconomics (MindTap Course List)EconomicsISBN:9781337617383Author:Roger A. ArnoldPublisher:Cengage Learning