EBK PRINCIPLES OF MACROECONOMICS
6th Edition
ISBN: 9780073534701
Author: Frank
Publisher: YUZU
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Chapter 11, Problem 5RQ
To determine
Diagrammatic representation of the consumption function and explain the economic meaning of movement from left to right and a parallel upward shift of the consumption function.
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12. Savings decisions
Kevin is a postdoctoral fellow who teaches astrophysics at a university where he earns an annual salary of $80,000. He intends to take the next year
off to focus on writing a new undergraduate physics textbook, so he will not earn any income next year. He is currently deciding how much of this
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Use the green line (triangle symbol) to plot Kevin's budget constraint (BC) on the following graph. Then use the black point (plus symbol) to show
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INTEREST RATE (Percent)
Supply
Demand
LOANABLE FUNDS (Billions of dollars)
Scenario 1: Individual Retirement Accounts (IRAS) allow people to shelter some of their income from taxation. Suppose the maximum annual
contribution to such accounts is $5,000 per person. Now suppose there is an increase in the maximum contribution, from $5,000 to $8,000 per year.
Shift the appropriate curve on the graph to reflect this change.
This change in the tax treatment of saving causes the equilibrium interest rate in the market for loanable funds to
investment spending to
Shift the appropriate curve on the graph reflect this change.
The implementation of the new tax credit causes the interest rate to
Demand
Supply
Scenario 2: An investment tax credit effectively lowers the tax bill of any firm that purchases new capital in the relevant time period. Suppose the
government implements a new investment tax credit.
This change in spending causes the government to run a budget
This causes the interest rate…
Depict graphically the equilibrium level of National Product (NP) using the Aggregate Expenditure (AE) function. Explain why the intersection of the 45 degree line and the AE function represents equilibrium by appealing to the difference between actual and desired investmen
Chapter 11 Solutions
EBK PRINCIPLES OF MACROECONOMICS
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- Assuming you are the Minister of Finance and Economic Planning for Nigeria, in charge of Fiscal Policy. The Research Director of the Ministry brought you the following data on Nigeria’s for the previous fiscal year, 2021. An examination of the data reveals that, during the fiscal year 2021, households in Nigeria saved 20% of their disposable income (Yd) and spent the rest on consumption. In addition, ₦5,000.00 was spent on Consumption expenditure (C), which is independent of income and Gross Private Investment (I) was ₦ 7,000.00. Total Government expenditure (G) which stood at ₦8,000.00 was supposed to be financed by a lump sum tax of ₦2,000.00 (independent of income) and a proportional tax rate of 25% of national income. Exports (X) stood at ₦2,500.00. In addition, the country’s import (M) during the previous fiscal year comprises of ₦1,000.00 which was independent of the country’s national income and 10% which was dependent of the country’s national income. Given these data on…arrow_forwardConsider a hypothetical economy in which the marginal propensity to consume (MPC) is 0.60. That is, if disposable income increases by $1, consumption increases by 60¢. Suppose further that last year disposable income in the economy was $450 billion and consumption was $400 billion. On the following graph, use the blue line (circle symbol) to plot this economy's consumption function based on these data. CONSUMPTION (Billions of dollars) 700 600 500 400 300 200 100 0 -100 0 100 200 300 400 500 600 DISPOSABLE INCOME (Billions of dollars) 700 800 ? From the preceding data, you know that the level of savings in the economy last year was $ economy is billion and the marginal propensity to save in this Suppose that this year, disposable income is projected to be $550 billion. Based on your analysis, you would expect consumption to be $ billion and savings to be $ billion.arrow_forwardConsider a hypothetical economy in which the marginal propensity to consume (MPC) is 0.50. That is, if disposable income increases by $1, consumption increases by 50¢. Suppose further that last year disposable income in the economy was $450 billion and consumption was $400 billion. On the following graph, use the blue line (circle symbol) to plot this economy's consumption function based on these data. CONSUMPTION (Blions of dollars) 700 800 500 400 300 200 100 0 -100 0 O ہے 100 200 300 400 500 600 DISPOSABLE INCOME (Billions of dollars) 700 800 10 Consumption Function From the preceding data, you know that the level of saving in the economy last year was economy is billion and the marginal propensity to save in this Suppose that this year, disposable income is projected to be $650 billion. Based on your analysis, you would expect consumption to be S billion and saving to be S billion,arrow_forward
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