Macroeconomics
10th Edition
ISBN: 9780134896441
Author: ABEL, Andrew B., BERNANKE, Ben, CROUSHORE, Dean Darrell
Publisher: PEARSON
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Chapter 4, Problem 5AP
To determine
To find the effect of permanent government spending on consumption, investment and interest rate.
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What would be the level of saving if the real GDP (Y) were at $7 trillion? what is the level of desired investment at this level? What forces are at work at a real GDP of $7 trillion? What will be the equilibrium level of real GDP?
Show on a graph of the market for saving and investment the
effect of the following. (The graph is a basic savings and
investment graph).
In an effort to improve fiscal conditions, policymakers raise taxes. This
results in lower disposable income.
Real interest rate (percent per year)
10.
8
6
4
2
SLF
0
1.2
1.4
1.6
DLF
2.0
2.2
1.8
Loanable funds (trillions of 2009 dollars)
The savings function [Select]
The investment function [Select]
The real interest rate [Select]
The level of savings and investment
[Select]
a. Suppose the government increases both taxes (7) and government purchases (G) by equal amounts. Assuming income
(Y) is fixed by the factors of production, the change in national saving (AS) will be
(MPC-1) * AT.
(1-MPC) x AT.
b. The larger is the MPC (the closer it is to 1), the
will be the increase in the interest rate.
will be the decline in investment, and the
Chapter 4 Solutions
Macroeconomics
Ch. 4 - Prob. 1RQCh. 4 - Prob. 2RQCh. 4 - Prob. 3RQCh. 4 - Prob. 4RQCh. 4 - Prob. 5RQCh. 4 - Prob. 6RQCh. 4 - Prob. 7RQCh. 4 - Prob. 8RQCh. 4 - Prob. 9RQCh. 4 - Prob. 10RQ
Ch. 4 - Prob. 1NPCh. 4 - Prob. 2NPCh. 4 - Prob. 3NPCh. 4 - Prob. 4NPCh. 4 - Prob. 5NPCh. 4 - Prob. 6NPCh. 4 - Prob. 7NPCh. 4 - Prob. 8NPCh. 4 - Prob. 9NPCh. 4 - Prob. 1APCh. 4 - Prob. 2APCh. 4 - Prob. 3APCh. 4 - Prob. 4APCh. 4 - Prob. 5APCh. 4 - Prob. 6APCh. 4 - Prob. 7APCh. 4 - Prob. 5WWMDCh. 4 - Prob. 6WWMD
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- Explain what happens to consumption, investment, and the interest rate when the government increases taxes. Show graphically the effect of increased taxes when saving is not dependent on interest rate.arrow_forwardEconomists often argue that a large increase in government purchases – such as for the military – will crowd out private-sector spending. Use the investment-saving diagram to defend or to refute their premise.arrow_forwardIn a closed economy, GDP is $1000, government purchases are $200, and consumption is $700. If the government has a budget surplus of $25, what are investment, taxes, private saving, and national saving? Explain with equations.arrow_forward
- Assume that GDP ( y) is 6.000. Consumption (C) is given by the equation C= 600 + 06(Y-T). Investment (I )is given by the equation I=2,000- 100r, where r is the real rate of interest in percent. Taxes (T) are government spending (G) is also 500 a. What are the equilibrium values of C, I, and r? b) What are the values of private saving, public saving, and national saving? ·arrow_forwardThe following table provides data for output (real GDP) and saving. a. Fill in the missing numbers (gray-shaded cells) in the table. Instructions: In the table, enter your answers for consumption as a whole number. Round your answers for APC and APS to 3 decimal places. Round your answers for MPC and MPS to 1 decimal place. If you are entering any negative numbers be sure to include a negative sign (-) in front of those numbers. Level of Output and Income (GDP = DI) Consumption Saving АРС APS MPC MPS 496 -0.033 -0.015 $480 $-16 1.033 520 528 -8 1.015 560 560 1.000 0.000 592 624 600 0.987 0.013 640 16 0.975 0.025 680 656 24 0.965 0.035 720 688 32 0.956 0.044 760 720 40 0.947 0.053 800 752 48 0.940 0.060arrow_forward12.1 If a GBP 10,000,000 increase in government expenditure resulted in a GBP 14,000,000 increase in real GDP in the United Kingdom, what would have been the change in real GDP if the government had instead cut taxes by GBP 10,000,000? Note: You can assume a constant investment and real interest rate for this question. 12.1 If a GBP 10,000,000 increase in government expenditure resulted in a GBP 14,000,000 increase in real GDP in the United Kingdom, what would have been the change in real GDP if the government had instead cut taxes by GBP 10,000,000? Note: You can assume a constant investment and real interest rate for this question.arrow_forward
- Please calculate level of GDP in equilibrium, consumption and savings level if you know that: I (investment) = 300 Ca (Autonomous Consumption) = 100 MPS (Marginal Propensity to Save) = 0,1 G (Government Expenditures) = 300 T (net taxe rate) = 0,2arrow_forwardA) What will be the new level of consumption at the $ 340 billion level of disposable income? B) What will be the new level of saving?arrow_forwardStep 2: The Effect of Saving on Total Expenditures The following table shows data for the economy before the decrease in saving. Suppose that the decrease in saving causes consumption to rise from $280 million to $320 million. Assume Say's law holds in this economy. Fill in the data for the economy after the decrease in saving. Before Saving Decrease $280 million $200 million $250 million $500 million $300 million Consumption (C) Investment (I) Government Purchases (G) Exports (EX) Imports (IM) As a result of the decrease in saving, total expenditures will After Saving Decrease $320 million million million $500 million $300 millionarrow_forward
- Economists in Funlandia, which has a closed economy, have collected the following information about the economy for a particular year: Y = 11,500 C = 7,000 T = 1,300 G = 1,900 The economists also estimate that the investment function is: I 3,200 - 100r where r is the country's real interest rate, expressed as a percentage. Complete the following table by calculating private saving, public saving, national saving, investment, and the equilibrium real interest rate. Component Private Saving Public Saving National Saving Investment Equilibrium Real Interest Rate Amountarrow_forwardTo find aggregate planned expenditures, which of the following must be added to consumption expenditure? i. net exports ii. investment iii. government expenditure on goods and services i only ii only iii only i and ii i, ii, and iii In the figure above, the shift in the supply of loanable funds curve from SLF1 to SLF3 could be the result of an increase in the real interest rate. an increase in expected future income. a decrease in expected future income. an increase in expected rate of profit. a decrease in the real interest rate.arrow_forwardSuppose that GDP is $8 billion, taxes are $1.5 billion, private saving is $0.5 billion, and public saving is 0.2 billion. Assuming the economy is closed, calculate the size of:(i) Consumption (ii) Investment (iii) Government Spending (iv) National Savings b. Explain the difference between saving and investment as defined by a macroeconomist. c. Which of the following situations in c (i) & c (ii) represent investment? Saving? Explain(i) Your family takes out a mortgage and buys a new house. (ii) You use your paycheque to buy stock in Sagicor Financial Services.arrow_forward
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