Macroeconomics (Fourth Edition)
4th Edition
ISBN: 9780393603767
Author: Charles I. Jones
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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Suppose exports increase.
According to the shares of spending model, what would happen to interest rates, consumption, investment, and net exports in the long run?
How does the slope of the IS curve of a closed economy compare with that of an open one? Reasons for this.
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?
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Macroeconomics (Fourth Edition)
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- The 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_forwardConsider 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_forward
- How do you explain why investment falls as interest rate risesarrow_forwardHow 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_forwardUse the IS curve to explains what happens to the short-run economy when consumers become pessimistic about the state of the economy and future GDP growth.arrow_forward
- Generally, 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_forwardIf foreign wealth-holders decide that the United States is the safest place to invest their savings, what would the effect be on the economy here? Show graphically using the AD/AS model.arrow_forward
- Explain the IS schedule, and how the IS curve is derived in a Closed Economy.arrow_forwardIn late 2009 and early 2010, real disposable income DI began growing at a slow pace, and during the same period, the value of corporate stocks held by households rose somewhat. How do you think this affected aggregate real consumption?arrow_forwardPlease talks about the some economic changes that make AS and AD curve becom steeper without shifting separately. Thank u :)arrow_forward
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