MyLab Economics with Pearson eText -- Access Card -- for Principles of Macroeconomics
12th Edition
ISBN: 9780134061191
Author: Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher: PEARSON
expand_more
expand_more
format_list_bulleted
Question
Chapter 8, Problem 4.4P
To determine
Wealth accumulation and the equilibrium level of
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Suppose Bank of England is considering using the tool of cutting interest rates to boost household consumption. In this question you will be asked to use the intertemporal choice model to assess the impact of different policies on household consumption. Suppose a consumer's current income is £25,000 and their future income is £30,000, and they initially face a market interest rate of 15% on both saving and borrowing. (a) In a diagram with consumption this year (C1) on the horizontal axis and consumption next year (C2) on the vertical axis, illustrate this consumer's budget constraint (using the numerical values set above) and indicate their optimal choice by drawing a indifference curve convex to the origin, assuming that at the current interest rate it is optimal for them to save. (b) Calculate (using the numerical values set above) and interpret their marginal rate of time preference at their optimal choice. (c) Illustrate and explain how a fall in the market interest rate from 15%…
The following graph shows the market for loanable funds. For each of the given scenarios, adjust the appropriate curve on the graph to help you complete the questions that follow. Treat each scenario separately by resetting the graph to its original state before examining the effect of each individual scenario.
(graph in image)
Scenario 1: Suppose savers either buy bonds or make deposits in savings accounts at banks. Initially, the interest income earned on bonds or deposits is taxed at a rate of 20%. Now suppose there is an increase in the tax rate on interest income, from 20% to 25%.
Shift the appropriate curve on the graph to reflect this change.
This change in the tax treatment of interest income from saving causes the equilibrium interest rate in the market for loanable funds to (a. fall, b. rise) and the level of investment spending to (a. increase, b. decrease).
Scenario 2: An investment tax credit effectively lowers the tax bill of any firm that purchases…
On the following graph, use the blue curve to plot investment as a function of disposable income:
According to the table, investment is:
a. Autonomous with respect to disposable income
b. Responsive to changes in interest rates
c. Responsive to changes in business expectations
d. Correlated with consumption
A terrorist attack that makes business forecasts more pessimistic would cause the investment function you drew previously to
a. Slope upward
b. Shift up
c. Shift down
d. Slope downward
Chapter 8 Solutions
MyLab Economics with Pearson eText -- Access Card -- for Principles of Macroeconomics
Knowledge Booster
Similar questions
- Consider the intertemporal model of consumption studied in class, with two possible periods. Consider initially that an individual is a borrower. If the interest rate increases: (a)The individual will never become a saver. (b)The individual will always remain a borrower. (c)The individual will be worse off, provided she remains a borrower. (d)The individual can be better off, but only if she becomes a saver. Both c and d.arrow_forwardAssume in a simple economy that the level of saving is –500 when aggregate output equals zero and that the marginal propensity to save is 0.2. Derive the saving function and the consumption function, and draw a graph showing these functions. At what level of aggregate output does the consumption curve cross the 45° line? Explain your answer and show this on the graph.arrow_forwardQuestion 1: In the case of a 2 sector economy model, when the income increases from RM 400 mil to RM 450 million, consumption increases from 200 million to 230 million. The autonomous investment is RM100 million. Assume autonomous consumption is 1.1) Calculate the value of MPC 1.2) Calculate the value of MPS 1.3) Derive consumption function, if the autonomous consumption is RM100 million 1.4) Construct saving function, if the autonomous saving is RM100 million Question 2: Given the following information C=200 + 0.75Y I=100 G=50 T=100 X=100 M=50 Find the equilibrium income by using the formula of Y = C + I + G + (X – M) Question 3: The following information is about monetary items for the country. ITEMS RM(Million) Paper money 5500 Negotiable certificate of deposit 3600 Fixed & savings deposits in other banking institutions 7900 Fixed & savings deposits in commercial banks 15000 Demand deposits 9000 Bank Negara Certificates 12000…arrow_forward
- The life cycle model of consumption argues that people consume and save in different proportions as they age. Seniors tend to consume more than save as their lives adjust to the realities of old age. Assuming the hypothesis is true, how would the aging of the very large baby boomer generation affect consumption and income?arrow_forwardClassify each of the following scenarios listed in the table below using the macroeconomic definitions of saving and investment. Saving Investment Manuel buys a government bond. Poornima borrows money to build an addition to a lab owned by her engineering firm. Valerie purchases shares of stock in Warm Breeze, a cloud computing company. Shen takes out a loan and uses it to build a new cabin in Idaho.arrow_forwardLet’s analyze the rational behavior and well-being of 3 different individuals in regards to their saving and borrowing behavior. I recommend drawing the intertemporal consumption model graph for each of the following situations. We will be analyzing three individuals; Charlie is saving at the current interest rate, Allison is borrowing at the current interest rate, and Chris is neither saving nor borrowing at the current interest rate. (a) Charlie is currently saving money (spending less than his current income) at the current interest rate. Will he be made better off if the interest rate subsequently increases? (b) Allison is currently borrowing money (spending more than her current income) at the current interest rate. Will she be made better off if the interest rate subsequently increases? (c) Chris is currently neither saving nor borrowing (spending exactly his current income) at the current interest rate. Will he be made better off if the interest rate subsequently increases?…arrow_forward
- Nick and Steve both obey the two-period Fisher model of consumption. Nick earns $300 in the first period and $300 in the second period. Steve earns nothing in the first period and $620 in the second period. Both of them can borrow or lend at the interest rate r. Nick and Steve both consume $200 in the first period and $200 in the second period. What is the interest rate r?arrow_forwardSuppose that the linear equation for consumption in a hypothetical economy is C = 40 + .8Y. Also suppose that income (Y ) is $400. Determine (a) the marginal propensity to consume, (b) the marginal propensity to save, (c) the level of consumption, (d ) the average propensity to consume, (e) the level of saving, and ( f ) the average propensity to save.arrow_forwardAssume an economy where the consumption function is defined as C = CC + CY and the investment function is defined as l = ir , where Y is total income and r is the interest rate. What does the slope of the IS curve depend on?arrow_forward
- Consider a hypothetical economy in which the marginal propensity to consume (MPC) is 0.75. That is, if disposable income increases by $1, consumption increases by 75¢. Suppose further that last year disposable income in the economy was $500 billion and consumption was $450 billion. On the following graph, use the blue line (circle symbol) to plot this economy's consumption function based on these data. Fill in the blanks From the preceding data, you know that the level of saving in the economy last year was ____________billion and the marginal propensity to save in this economy is ___________. Suppose that this year, disposable income is projected to be $700 billion. Based on your analysis, you would expect consumption to be _______ billion and saving to be ________ billion.arrow_forwardExplain the difference between saving and investment as defined by a macroeconomist. Which of the following situations represent investment and which represent saving? Explain.a. Your family takes out a mortgage and buys a new house.You use your $200 paycheck to buy stock in Africel.Your roommate earns $100 and deposits it in his account at a bank.You borrow $1,000 from a bank to buy a car to use in your pizza delivery business.The interest rate is 7 percent. Use the concept of present value to compare $200 to be received in 10 years and $300 to be received in 20 years.A company has an investment project that would cost $10 million today and yield a payoff of $15 million in 4 years.Should the firm undertake the project if the interest rate is 11 percent? 10 percent? 9 percent? 8 percent?Can you figure out the exact cutoff for the interest rate between profitability and nonprofitability?arrow_forwardIn a two-period model, an individual earns and consumes C1 in period 1 and only consumes C2 in period 2. Suppose the saving interest rate is 3.3% and the income in period 1 is $4,500. Assuming consumption smoothing, the consumption (C1 or C2) for period 1 and period 2 should be $ A . Compute A.In a two-period model, an individual earns and consumes C1 in period 1 and only consumes C2 in period 2. Suppose the saving interest rate is 3.3% and the income in period 1 is $4,500. Assuming consumption smoothing, the consumption (C1 or C2) for period 1 and period 2 should be $ A . Compute A.arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Economics (MindTap Course List)EconomicsISBN:9781337617383Author:Roger A. ArnoldPublisher:Cengage Learning
Economics (MindTap Course List)
Economics
ISBN:9781337617383
Author:Roger A. Arnold
Publisher:Cengage Learning