Macroeconomics
10th Edition
ISBN: 9781319105990
Author: Mankiw, N. Gregory.
Publisher: Worth Publishers,
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Chapter 19, Problem 7QR
To determine
Tobin’s q and the investment.
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If consumers decide to increase saving, then C decreases, r decreases, I increases, and Y:
What determines the slope of a consumption function?
Consider two savings accounts that pay the same interest rate. One account lets you take your money out on demand. The second requires that you give 30-day advance notification before withdrawals. Which account would you prefer? Why? Can you imagine a person who might make the opposite choice? What do these choices say about the theory of the consumption function?
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- State 3 characteristic of the consumption function ?arrow_forwardDerive the investment function (using the neoclassical model of investment). Explain how investment responds to changes in Marginal Product of Capital and interest rate.arrow_forwardExplain the difference between the stock variable and a flow variable in economics with one example of each.arrow_forward
- The importance of income in determining savings has persisted since the time of Keynes. Why have other theories failed to displace income as the most critical variable in saving theory?arrow_forwardWhat does Tobin's q tell us about what determines a firm's investment decision?According to the the Tobin's q, when should a firm invest?arrow_forwardBen earns $7,200 this year and zero income the next year. Ben also has an investment opportunity in which he can invest $3,100 and receive $7,000 next year. Suppose Ben consumes $3,000 this year, invests in the project, and consumes $8,205 next year. a. What is the market rate of interest? (Hint: The new market interest rate line EF is parallel to AH.) Market rate % b-1. Suppose the interest rate increases. What will happen to Ben's consumption for this year? If interest rate increases, Ben's consumption (Click to select) ✓ b-2. Is Ben better off or worse off than before the interest rate rise? Ben is (Click to select) ✓off than before the interest rise.arrow_forward
- Draw the consumption function as the relation of the consumer's income and expenditure. What does the slope of the consumption function depend on? Is the consumer's income the only factor determining the level of his consumption spending?arrow_forwardDraw a consumption function for an individual whereS=-250+0.3Y. Show the change that would result from an increase in Income.arrow_forwardSuppose, that a consumer is a saver, who saves some of his first-period income, and interest rate increases. Discuss the income and substitution effects on consumption in both periods. How consumptions in both periods will change?arrow_forward
- we use the Fisher model to discuss a change in the interest rate for a consumer who saves some of his first-period income. Suppose, instead, that the consumer is a borrower. How does that alter the analysis? Discuss the income and substitution effects on consumption in both periods.arrow_forwardExplain the term random walk in consumption. Under what conditions will consumption follow such a behaviour?.arrow_forwardWho gave the relative income hypothesis of consumption?arrow_forward
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