Macroeconomics (Fourth Edition)
4th Edition
ISBN: 9780393603767
Author: Charles I. Jones
Publisher: W. W. Norton & Company
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Chapter 16, Problem 8RQ
To determine
Key facts about the behavior of the personal saving during recent decades and place these facts in their
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This question addresses the impact of saving on an economy by examining what happens if tax laws change to induce saving and how changes in tax laws can discourage saving.
The following graph shows the market for loanable funds.
Show the impact of a change in the tax law that successfully encourages saving by shifting either the demand curve (D), the supply curve (S), or both.
A tax law change that successfully encourages saving will (increase/decrease) interest rates, which leads to (less/more) investment and economic growth.
To better understand how changes in tax laws can affect saving, suppose that Madison, a rising third-year in college, plans to save $550 from her summer job in order to buy textbooks for the upcoming fall semester. Madison's parents are so impressed with her plans that they offer to pay her an additional 30% interest per month on the money she saves, which means that Madison is now earning a large rate of return on her saving. By the end of the…
Classify each of the following scenarios listed in the table below using the macroeconomic definitions of saving and investment.
Shen purchases a new townhouse in Hartford.
Poornima borrows money to build an addition to a lab owned by her engineering firm.
Manuel purchases a certificate of deposit at his bank.
Valerie purchases stock in Tesqar, a biotech firm.
Saving Investment
O
Classify each of the following based on the macroeconomic definitions of saving and investment.
Saving
Investment
Neha borrows money to build a new lab for her engineering firm.
Teresa purchases stock in Pherk, a pharmaceutical company.
Sam purchases a new condominium in San Francisco.
Lorenzo purchases a certificate of deposit at his bank.
Chapter 16 Solutions
Macroeconomics (Fourth Edition)
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Similar questions
- Classify 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_forwardHow does a decrease in the tax rate on income earned on saving affect saving, investment, the interest rate, and economic growth?arrow_forwardThe importance of income in determining savings has persisted since the time of Keynes. Why have other theories failed to displace income as the most critical variable in saving theory?arrow_forward
- What might deter a policymaker from trying to raise the rate of saving?arrow_forwardGraphically illustrate (draw) and explain the effect of a sustained increase in savings on the growth of output (Provide explanations)arrow_forwardExplain how changes in interest rates and rates of return on various investment options will affect the amount of money that businesses are willing to invest to increase output.arrow_forward
- Financial institutions have warned that increased life expectancy means that many people have not saved enough for their retirement. If true, what will the consumption path of these people look like as they reach their retirement years? Will this consumption path be smooth? And how will an increase in investment demand change the equilibrium interest and quantity of savings? Use a graph for the loanable funds market.arrow_forwardMost Australians are found to be frugal during the coronavirus pandemic and have started saving more. Explain how an increase in household saving affects the equilibrium interest rate and the equilibrium quantity of loanable funds.arrow_forwardIn Classical theory, Saving may increase due to decrease in Interest Ratearrow_forward
- Explain what happens to savings, investment and the real interest rate in an economy if the government reduces its military spending.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_forwardan increase in the expected real interest rate tends to raise desired saving, but lower desired investment. Explain how and why? Also give an example.arrow_forward
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