EP ECONOMICS,AP EDITION-CONNECT ACCESS
20th Edition
ISBN: 9780021403455
Author: McConnell
Publisher: MCGRAW-HILL HIGHER EDUCATION
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Chapter 37, Problem 1RQ
To determine
Effect of sticky on gross investment.
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Discuss the following statements:
a. The Keynesian multiplier is higher the higher is the degree of openness of the economy'.
b. 'There is no easy policy answer when it comes to dealing with a negative supply shock'.
Consider the following economy. The production function is F(K,L) = K0.3 Lº.7. The saving rate
and the depreciation rate are respectively: s = 0.10 and 8 = 0.07. Population growth is 1%, i.e.
n = 0.01.
c. Derive the capital accumulation equation for this economy.
d. Find the steady state value of the capital stock per capita.
e. Suppose that the initial capital stock per capita is: k = 1.5. Discuss the process of
convergence of the economy to the steady state using the appropriate diagram.
f. Calculate the optimal saving rate of the economy and discuss whether the economy at the
steady state over or under-accumulates capital.
O
2
5
real interest rate
Refer to the figure above. If the economy starts at point 0, how would you illustrate the effect of a positive technological shock
that increases returns to investment in high-tech industries, by moving to point:
3
S2
S3 S1
3
2
*
5
D1 D2
Loanable funds
LAST WORD What is Say's law? How does it relate to the view held by classical economists that the economy generally will operate at a position on its production possibilities curve? Use production possibilities analysis to demonstrate Keynes's view on this matter.
Chapter 37 Solutions
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- Suppose consumption function is specified as C= $200 + 0.75Ya planned investment is $600, net taxes are $400, and government spending totals $500 of a hypothetical economy in 2020. Find algebraically: LO 3 A. The equilibrium level of aggregate output by equating aggregate output and planned aggregate expenditure. B. Consumption when aggregate output is at the equilibrium level. C. Saving when aggregate output is at the equilibrium level. D. Establish that leakages equal injections at the equilibrium level of aggregate output.arrow_forwardConsider the data shown in the table. Assume that the economy produces only textbooks. What is the growth rate of real GDP between the two years using last year as the base year? |Textbooks Actual Price Sold Last year This year 5,000 $50 5,250 $55 10% 5% O 2.5% 15%arrow_forward9. Suppose Dina calculates her permanent income by adaptive expectations. Year 2010 Dina's permanent income was 68,000, and year2011 actual income is 71,000. Assume that, long-run marginal to consume is 0.90 and short-run marginal propensity to consume is 0.18. What is her consumption expenditure year 2011? * O 51,740 O 41,740 O 59,500 O 44,750 none of the above is correctarrow_forward
- d. A decrease in aggregate demand. e. An increase in aggregate demand that exceeds an increase in aggrega supply.arrow_forwardThe diagram below show the market for financial capital assuming that national income is constant at potential GDP, Y*. Real Interest Rate I EL ME 14 FIGURE 25-2 NSO I 11 12 13 NS1 1 1 Quantity of Investment and Saving ($) Refer to Figure 25-2. Suppose national saving is reflected by NS, and investment demand is reflected by lo. Now suppose the government implements a revenue-neutral tax policy that encourages investment. What is the effect on the real interest rate? Select one: O a. There is no effect on NS or ID, and the interest rate remains at i*. O b. The real interest rate rises because of the decrease in the budget surplus. O C. National saving shifts to NS₁, and the real interest rate falls to i3. O d. Investment demand shifts to 1₁D, and the real interest rate rises to i₂. O e. The real interest rate falls because of the decrease in the budget surplus.arrow_forwardChange in business inventories Compensation of employees Corporate profits Durable goods Exports Social Security taxes Transfer payments Fixed investment Government spending Imports Net interest Nondurable goods Personal taxes Rental income Services In Exhibit 5-10, compute personal income (PI). Which of the following is correct? O $7,110 billion. O $7,410 billion. $6,740 billion. $7,760 billion. $6.780 billion. 50 5,400 700 600 100 360 300 950 800 150 500 2,000 1,000 200 4,000arrow_forward
- 9. Suppose Amal calculates her permanent income by adaptive expectations . Year 2020 Amal's permanent income was 38,000 , and year 2021 actual income is 41,000 . Assume that , long - run marginal to consume is 0.90 and short - run marginal propensity to consume is 0.28 . What is her consumption expenditure year 2021 ? O 36.774 O 35,040 O 40.226 O 33.454 O 34.740 O None of the above is correctarrow_forwardConsider a closed economy (no trade) where: C = 400+0.8YD lo = 1600 Go = 2200 NT = 0.2Y a. Calculate Y*. b. If Yp=10,000, is there an inflationary or recessionary gap? c. Calculate the change in government expenditure (G) necessary to move the economy back to its potential.arrow_forwardAccording to the table, in which year did buyers of six-month Treasury bills receive the highest real return on their investment? O. 1971 O. 1972 O. 1973 O. 1974 O. 1975arrow_forward
- /se estion 5 Suppose you were looking at an economy where the consumption function is; C = 50 +0.75Y And you know that investors want to spend 500 at every level of income. In other words 1-500 a. What is the equilibrium level of income? b. If the full - employment level of income is 2000, is there a recessionary gap? If so, how large is the gap? c. What will happen to the equilibrium level of income if investors become pessimistic about the country's future and reduce their investment to 400? d. Is there an inflationary or recessionary gap now? How large? marks) Format Tools Table TV- BIU AV V T²v / povarrow_forwardline shows the relationship between planned aggregate expenditure and output, and line represents the condition that planned aggregate expenditure and output are equal. In the Keynesian cross diagram, the the expenditure; 45-degree O45-degree; consumption function 45 degree; expenditure consumption function; 45-degreearrow_forwardFigure 13-4 Price level 112 110 8% O 12% 10% LRAS O 9.1% LAAS SRAS, 11.0 118 12.1 AD, SRAS Refer to Figure 13-4. In the figure above, LRAS₁ and SRAS1 denote LRAS and SRAS in year 1, while LRAS2 and SRAS2 denote LRAS and SRAS in year 2. Given the economy is at point A in year 1, what is the growth rate in potential GDP in year 2? AD₂ Real GDP (trillions of dollars)arrow_forward
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