Macroeconomics
10th Edition
ISBN: 9780134896441
Author: ABEL, Andrew B., BERNANKE, Ben, CROUSHORE, Dean Darrell
Publisher: PEARSON
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Chapter 9, Problem 1NP
To determine
To Evaluate:Effects on different economic variable under different condition using IS-LM model.
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Students have asked these similar questions
Suppose the following equations represents a closed economy:
Y= C + I + G
Y = 4000
G = 500
T = 500
C = 500 + 0.7 (Y – T)
I = 1000 – 40r
In this economy, compute the value of consumption (C), private saving, public saving, and national saving. Also, find the equilibrium interest rate (r).
Now suppose that government spending (G) rises (expansionary fiscal policy) to 300. Compute private saving, public saving, and national saving. Also, find the new equilibrium interest rate (r).
In part (b), due to expansionary fiscal policy (increase in government spending), which of the two other components of aggregate demand changes, C or I? Why? (Hint: Note the real interest rate)
An economy has full-employment output of 9000, and government purchases are 2000. Desired
consumption and desired investment are as follows:
Real Interest
Desired
Desired
Rate (%)
Consumption
Investment
2
6100
1300
6000
1200
4
5900
1100
5
5800
1000
6
5700
900
If the goods market is in equilibrium, what are the values of the real interest rate, desired national
saving, and desired investment?
r =
%. (Enter your answer as a whole number.)
(Enter your answer as a whole number.)
%3D
Consider the closed-economy market-clearing model. Assume that the marginal propensity to consume is 0.8. Tax revenue decreases by $5 billion, while output and government spending remain the same
(a) Calculate the dollar change in consumption.
(b) Calculate the dollar change in national saving.
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- In a closed economy, the gross domestic product is $25,000, consumption is $8,200 and taxes are $3,700. If the national saving is 3,000, if the investment function is represented by I = 3,400-80r, the equilibrium interest rate is: Select one: a. 12% b. 5% c. 3% d. 8% e. None of the answers are correctarrow_forwardThe government of Old Flanders is planning to borrow heavily to finance spending on scientific research and development, education and defence. Use the supply and demand model (and a diagram) for saving and investment to explain the likely effects of this scheme on national saving, investment and the real interest rate in New Holland when its economy is closed. Explain the effectsarrow_forwardAn economy has government purchases of 2000 (G=2,000). Desired national saving and desired investment are given by Sd = 200 + 500Or + (0.1Y) - (0.2G) Id = 1000 - 4000r When the full-employment level of output equals 5000, A. What is the equilibrium real interest rate? B. What is the equilibrium level of desired Investment? c. What is the equilibrium level of consumption?arrow_forward
- Consider following equations: Y=C + I +G Y=7,000 G=4000 T=2,000 C=150+0.75(Y-T) I=1,000-50r Now suppose the G rises BY 1,000. Compute private saving, public saving, and national saving. Calculate the new equilibrium interest rate.arrow_forwardAssume 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_forwardConsider an economy described by the following equations: Y = C+I+G Y = 5000 G = 1000 T = 1000 C = 250 + 0.75(Y-T) I = 1000 - 50r In this economy, compute private saving, public saving, and national saving. Find equilibrium interest rate. Now suppose that G rises to 1250. Compute private saving, public saving, and national saving. Find the new equilibrium interest rate. Using your knowledge of Macroeconomics and intuition explain the reason why increasing government expenditure causes interest rate to rise? If the government wants to increase the amount of savings in the economy, how should it alter government spending? What effect will this action have on the interest rate in the economy?arrow_forward
- So far we have assumed that consumption is determined by disposable income (C = C(Y-T), with the function increasing) and investment is determined by the real interest rate (I = I(r), with the function decreasing). But the real interest rate may affect households' choice between consumption and saving, and firms' sales or cash flow may influence their investment. This problem therefore asks you to consider the implications of some alternative assumptions. a. Suppose C = C(Y-T,r), with C a decreasing function of r. With this change in the model, does an increase in G increase C, decrease it, or leave it unchanged, or is it not possible to tell? b. Suppose II(Y-T,r), with I an increasing function of Y-T (and suppose that C is given by C(YT)). Does an increase in G increase I, decrease it, leave it unchanged, or is it not possible to tell? C. Suppose there are two types of investment. One (for example, the investment of large, mature firm) is determined by the real interest rate, and the…arrow_forwardSo far we have assumed that consumption is determined by disposable income (C=C(Y-T), with the function increasing) and investment is determined by the real interest rate (I = I(r), with the function decreasing). But the real interest rate may affect households' choice between consumption and saving, and firms' sales or cash flow may influence their investment. This problem therefore asks you to consider the implications of some alternative assumptions. a. Suppose C=C(Y-T,r), with C a decreasing function of r. With this change in the model, does an increase in G increase C, decrease it, or leave it unchanged, or is it not possible to tell? b. Suppose II(Y-T,r), with I an increasing function of Y-T (and suppose that C is given by C(Y T)). Does an increase in G increase I, decrease it, leave it unchanged, or is it not possible to tell? C. Suppose there are two types of investment. One (for example, the investment of large, mature firm) is determined by the real interest rate, and the…arrow_forwardConsider the following functions for consumption and investment: C = 1,000 + (2/3)*(Y – T) and I = 1,200 – 100*r. Furthermore, Y = 8,000, G = 2500, T = 2,000. Compute private, public, and national savings for this economy, and find the equilibrium real interest rate (r). Assume that G declines by 500 units. How will it change your answers in part (a)? What happens to the national savings, given everything else, if the public decides to consume less out of their disposable income (assume that the propensity of consume falls by 10 percent)? Given your answer in part (c), what happens to investment and real interest rate? Answer all four.arrow_forward
- consider an economy described as follows: Y= C + |+ G. Y = 8,000 G = 2,500 T = 2,000 C = 1000+ 2/3 ( Y - T ) | = 1,200 - 100r in this economy, compute private saving, public saving, national saving. find the equilibrium interest rate.arrow_forwardCd=360-200r+0.1Y I'd=120-400r G=120 find an equation for desired national saving ,Sd in term of output Y and the reason . what value of the real interest rate clear the goods market Y=550 and when Y=650 ? Use the goods market equilibrium condition to derive the IS curve grapharrow_forwardConsider an economy described by the following equations: Y=C + I +G Y=7,000 G=4000 T=2,000 C=150+0.75(Y-T) I=1,000-50r In this economy, compute private saving, public saving and national saving. Calculate the equilibrium interest rate. Now suppose the G rises BY 1,000. Compute private saving, public saving, and national saving. Calculate the new equilibrium interest rate.arrow_forward
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