Macroeconomics
4th Edition
ISBN: 9780393602487
Author: Jones, Charles I.
Publisher: W. W. Norton & Company
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Chapter 20, Problem 5RQ
To determine
Explain how and why the net export and investment are similar.
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- How does the slope of the IS curve of a closed economy compare with that of an open one? Reasons for this.arrow_forwardUsing the IS–LM diagram, show the effects on output and the interest rate of a increase in government spending. Can you tell what happens to investment? Why?arrow_forwardExplain in words how investment multiplier and the interest sensitivity of aggregate demand affect the slope of the IS curve.arrow_forward
- It is possible that the interest rate might affect consumption spending. An increase in the interest rate could, in principle, lead to increases in saving and therefore a reduction in consumption, given the level of income. Suppose that consumption is, in fact, reduced by an increase in the interest rate. How will the IS curve be affected?arrow_forwardIf the economy is net importer, what will that do to the aggregate expenditure function and equilibrium level of real GDP?arrow_forwardThe propensity to consume tells us by how much consumption changes for a given change in disposable income. To analyze this fact, follow these steps: 5- Go to the Federal Reserve Economic Data (FRED) https://fred.stlouisfed.org/. download the series A067RX1A020NBEA and PCECCA since 1999. Make sure all series are in real terms and in comparable units. Compile a single spreadsheet with these series. 6- In the spreadsheet, first compute the annual growth rate of disposable income and consumption for all years in the sample. Then compute the average for the period 2000-2017 for both variables. Finally, construct a demeaned measure of the annual growth rate of disposable income and consumption for all years in the sample. That is, let C t denote consumption in year t. Then, the growth rate of consumption between year t and t−1 is [(C t /C t−1 )−1], denoted by gC t. Now, let gC denote the average annual growth rate in consumption since 2000 . This number will stay fixed and not changing…arrow_forward
- Consider an economy described by the following data:C = $3.25 trillionI = $1.3 trillionG = $3.5 trillionT = $3.0 trillionNX = - $1.0 trillionf = 1mpc = 0.75d = 0.3x = 0.1a. Derive simplified expressions for the consumptionfunction, the investment function, and the net exportfunction.b. Derive an expression for the IS curve.c. If the real interest rate is r = 2, what is equilibriumoutput? If r = 5, what is equilibrium output?d. Draw a graph of the IS curve showing the answersfrom part (c) above.e. If government purchases increase to $4.2 trillion,what will happen to equilibrium output at r = 2?What will happen to equilibrium output at r = 5?Show the effect of the increase in government purchases in your graph from part (d).arrow_forwardHow would an increase in the interest rate affect consumption and investment function?arrow_forwardHow do you explain why investment falls as interest rate risesarrow_forward
- How are the following events likely to influence the level of American net exports? 1) Consumers in Europe become more prosperous, while the United States is mired in a recession. 2) The United States encounters a period of unexpectedly high inflation.arrow_forwardGenerally, the price level variations impact the overall aggregate demand positively or negatively. In this context, discuss various effects of decrease in price level on consumption, investment and net exports. Give examples to support your answer.arrow_forwardWhy will a reduction in the real interest rate increase investment spending, other things equal? Why is investment spending unstable?arrow_forward
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