Macroeconomics
10th Edition
ISBN: 9780134896441
Author: ABEL, Andrew B., BERNANKE, Ben, CROUSHORE, Dean Darrell
Publisher: PEARSON
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Chapter 4, Problem 7AP
To determine
To find the effect of interest rates on indifference curve and on budget line.
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Scenario 1: Individual Retirement Accounts (IRAs) allow workers to shelter a portion of their income from taxation. Suppose the maximum annual contribution to accounts of this type is $6,000 per person. Now suppose there is an increase in the maximum contribution, from $6,000 to $9,000 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 tofall and the level of investment spending toincrease .
Scenario 2: An investment tax credit effectively lowers the tax bill of any firm that purchases new capital within some relevant time period. Suppose the government implements a new investment tax credit.
Shift the appropriate curve on the graph to reflect this change.
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Q5) Consumption-Saving Choice
Based on Abel, Bernanke and Croushore, 10th edition, Chapter 4, Numerical Problems No. 1.
A consumer is making saving plans for this year and next. She knows her real income after
taxes will be $50,000 in both years. Any part of her income saved this year will earn a real
interest rate of 10% between this year and next year. Currently, the consumer has no wealth
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the future.
a) Formally derive the consumer's intertemporal budget constraint.
b) Using the given numerical values rewrite and graph the budget line.
c) Find the consumer's PVLR.
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 Fall/Rise and the level of investment spending to decrease/Increase
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.
Shift the appropriate curve on the graph to reflect this change.
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Scenario 3: Initially, the government's budget is…
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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- Based on Abel, Bernanke and Croushore, 10th edition, Chapter 4, Numerical Problems No. 1. A consumer is making saving plans for this year and next. She knows her real income after taxes will be $50,000 in both years. Any part of her income saved this year will earn a real interest rate of 10% between this year and next year. Currently, the consumer has no wealth (no money in the bank or other financial assets, and no debts). There is no uncertainty about the future. a) Formally derive the consumer’s intertemporal budget constraint. b) Using the given numerical values rewrite and graph the budget line. c) Find the consumer’s PVLR. The consumer wants to save an amount this year that will allow her to (1) make college tuition payments next year equal to $16,800 in real terms; (2) enjoy exactly the same amount of consumption this year and next year, not counting tuition payments as part of next year’s consumption; and (3) have neither assets nor debts at the end of next year. d) In the…arrow_forwardDemand Supply Supply Demand LOANABLE FUNDS (Billions of dollars) 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%. INTEREST RATE (Percent)arrow_forward5. The market for loanable funds and government policy The following graph shows the loanable funds market. For each of the given scenarios, adjust the appropriate curve on the graph to help you complete the questions that follow. Consider each scenario separately by returning the graph to its starting position when moving from one scenario to the next. (Note: You will not be graded on any changes you make to the graph.) INTEREST RATE (Percent) Demand LOANABLE FUNDS (Billions of dollars) Supply Demand Supplyarrow_forward
- 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(fall,rise) and the level of investment spending to(decrease,increase) .arrow_forwardScenario 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 a decrease in the tax rate on interest income, from 20% to 15%. 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 and the level of investment spending toarrow_forward5. The market for loanable funds and government policy 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. (Note: You will not be graded on any changes you make to the graph.) INTEREST RATE (Percent) I Demand LOANABLE FUNDS (Billions of dollars) Supply Demand Supply *arrow_forward
- Suppose that y =100 (income today) • y' = 150 (income tomorrow) 10% (interest rate on bonds) %3D r = • t = 10 (taxes today) • t' = 10 (taxes tomorrow) Suppose that c = 100. Is the consumer borrowing or saving, today? And what will her budget constraint look tomorrow? The consumer is borrowing. Her budget constraint tomorrow will be c' = 150 -10 - 10*(1.1) = 129 The consumer is saving. Her budget constraint tomorrow will be c' = 150 -10 + 10*(1.1) = 151 O The consumer is neither borrowing nor saving - she is breaking even. Her budget constraint tomorrow will be c' = 150 -10 = 140 O The consumer is saving. Her budget constraint tomorrow will be c' = 150 + 10*(1.1) = 161 %Darrow_forwardAt its meeting ending on 2 February 2022, The Bank of England (BOE) Monetary Policy Committee (MPC) voted to increase interest rate. Consumers react this rise in the interest: rate and adjust their choices between spending today and spending tomorrow. Suppose that there are two consumers: 1) John is a saver, and he decides to increase his savings after the BOE policy: 2) Lili is a saver, and she decides to decrease her savings after the BoE policy. Use the Life-Cycle Model (LCM) to answer the following questions. a) Draw a diagram to show the optimal choice for John. Explain your answer and your diagram in detail.arrow_forward4. Mateo is deciding how many dollars to consume today and how many to consume next week. We earns $1,000 each week and earns a real interest rate of p = 0.01 on any money saved today. He also needs to pay the same interest rate if he borrows money today and repays it next week. If his utility function is U (C₁, C₂) = cc₂, where c₁ is units of consumption today and c₂ is units of consumption next week, how many units will he consume this week?arrow_forward
- The table given below shows the disposable income and consumption of a household. In the table below, saving: Table 9.1 Disposable Income ($) Consumption ($) 1,000 800 1,100 880 1,200 960 1,300 1,040 1,400 1,120 O is negative at a disposable income of $1,400. O is negative at a disposable income of $1,000. O decreases as disposable income increases. O remains constant as disposable income increases.arrow_forwardGraphically illustrate (draw) and explain the effect of a sustained increase in savings on the growth of outputarrow_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
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