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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Why is inventory investment counted as part of aggregate spending if it isn’t actually sold to the final enduser
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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?
Chapter 20 Solutions
Macroeconomics (Fourth Edition)
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- How does the slope of the IS curve of a closed economy compare with that of an open one? Reasons for this.arrow_forwardIf a change in the real interest rate has no effect onplanned investment spending or net exports, what doesthis imply about the slope of the IS curve?arrow_forwardUsing the IS–LM diagram, show the effects on output and the interest rate of a increase in government spending. Can you tell what happens to investment? Why?arrow_forward
- Explain in words how investment multiplier and the interest sensitivity of aggregate demand affect the slope of the IS curve.arrow_forwardHow does a change in the interest rate affect aggregate investment ? What if firms prefer to pay for investment spending out of retained earnings ? Does a change in the interest rate still affect aggregate investment Does the amount of government spending in an econ omy respond directly to changes in aggregate income , wealth , or interest rates ? Does it respond indirectly to changes in these variables ?arrow_forwardIt 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?arrow_forward
- If the economy is net importer, what will that do to the aggregate expenditure function and equilibrium level of real GDP?arrow_forwardThe 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_forward
- How would an increase in the interest rate affect consumption and investment function?arrow_forwardHow do you explain why investment falls as interest rate risesarrow_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
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