Question 1

If consumers believe that next year a recession will occur (in a closed economy),then the real interest rate ________ and investment ________.

Accepted Answer

The answer of If consumers believe that next year a...

Question 2

The substitution effect of a decrease in real interest rates is to cause a consumer to

Accepted Answer

A decrease in real interest rates causes a decrease in the return on saving and an increase in the return on current consumption. This causes consumers to lower their future saving, and increase their current consumption. Therefore, the substitution effect of a decrease in real interest rates is to decrease future consumption and increase current consumption.

Question 3

A temporary supply shock,such as a drought,would

Accepted Answer

The answer of A temporary supply shock,such as a drought,would
...

Question 4

If consumers foresee future taxes completely,a reduction in taxes this year that is accompanied by an offsetting increase in future taxes would cause

Accepted Answer

If consumers fully anticipate future taxes, a reduction in taxes this year offset by a future increase would not change their overall consumption and saving plans. They understand that any tax cut now will be compensated by higher taxes later, leaving their lifetime budget unchanged. This understanding leads to no shift in either the saving or the investment curve.

Question 5

Suppose the government provides a tax cut today that is matched by a tax increase in the future that's equal in present value to the tax cut.This causes a consumer's saving to

Accepted Answer

The answer of Suppose the government provides a tax cut...

Question 6

David consumes 200 in the current period and 330 in the future period.The real interest rate is 10% per period.David's present value of lifetime consumption is

Accepted Answer

To find the present value of lifetime consumption, we need to discount the future consumption by the real interest rate.

Present value of future consumption = Future consumption / (1 + real interest rate)

Present value of future consumption = 330 / (1 + 0.1) = 300

Total present value of lifetime consumption = Present consumption + Present value of future consumption 
Total present value of lifetime consumption = 200 + 300 = 500

Therefore, the answer is choice A) 500.

Question 7

Use a saving-investment diagram to explain what happens to saving,investment,and the real interest rate in each of the following scenarios in a closed economy.
(a)In an agricultural economy,great weather this year promises a bumper crop next year,leading citizens to expect higher income next year.
(b)Government regulations going into effect next year will reduce the marginal product of capital.
(c)The government increases lump-sum taxes on citizens.

Accepted Answer

The answer of Use a saving-investment diagram to explain what...

Question 8

An economy has full-employment output of 5000.Government purchases are 1000.Desired consumption and desired investment are given by C^d = 3000 - 2000r + 0.10Y I^d = 1000 - 4000r where Y is output and r is the expected real interest rate. (a)Find the real interest rate that clears the goods market.Assume that output equals full-employment output. (b)Calculate the amount of saving,investment,and consumption in equilibrium. (c)If a shock to wealth causes desired consumption to decline by 200 (so that the new equation for desired consumption is C^d = 2800 - 2000r + 0.10Y),find the equilibrium real interest rate,saving,investment,and consumption.

Accepted Answer

The answer of An economy has full-employment output of 5000.Government...

Question 9

Onerous regulations on businesses that take effect next year (in a closed economy)reduce businesses' expected future marginal product of capital.As a result,the real interest rate ________ and saving ________.

Accepted Answer

Onerous regulations reduce the expected future marginal product of capital, making investment less attractive. This leads to a decrease in the demand for loanable funds, which lowers the real interest rate. With a lower return on savings, individuals are less incentivized to save, leading to a decline in saving.

Question 10

If Claudette gets a permanent increase in her income of $1000 per year,she saves an extra $200 this year and consumes an extra $800 this year.If the increase in income had been temporary instead of permanent,she would have saved ________ of the extra income.

Accepted Answer

When an increase in income is perceived as temporary, individuals are more likely to save a larger portion of it, compared to when the increase is seen as permanent. In Claudette's case, since she saved $200 out of a $1000 increase in income when it was permanent, she would likely save more than $200 if she viewed the increase as temporary, anticipating that her future income would not be as high.

Question 11

A temporary decrease in government purchases would cause

Accepted Answer

A temporary decrease in government purchases would lead to an increase in public saving, shifting the saving curve to the right. However, it does not directly affect the investment curve, which is influenced by factors like interest rates and business expectations.

Question 12

If the stock market booms and people feel wealthier (in a closed economy),then the real interest rate ________ and investment ________.

Accepted Answer

In a closed economy, if the stock market booms and people feel wealthier, they are likely to save less and spend more, increasing the demand for goods and services. This can lead to higher interest rates as the demand for funds to invest increases. Higher interest rates can make borrowing more expensive, potentially leading to a decline in investment.

Question 13

Rachel earns nothing during her learning period,1100 during her working period,and nothing during her retirement period.She has initial assets of 300.The real interest rate is zero.Rachel is not allowed to borrow by the banks.Whenever possible,Rachel wants to smooth consumption between periods.How much will she save during her working period?

Accepted Answer

Since Rachel wants to smooth consumption, she should consume the same amount during her learning period and retirement period, which means she should consume $300 (initial assets) divided by 4 (number of periods) = $75 during those periods. Therefore, during her working period, she should consume $1100 - $75 - $75 = $950. Since the real interest rate is zero, there is no benefit to saving more than necessary for future consumption. Therefore, Rachel will save $1100 - $950 = $150 during her working period.

Question 14

Any change in the economy that raises desired national saving for a given value of the real interest rate will shift the desired national saving curve to

Accepted Answer

When desired national saving increases for a given real interest rate, the desired national saving curve shifts to the right. This increase in saving supply for loanable funds tends to lower the real interest rate because more funds are available for investment at any given rate.

Question 15

Use a saving-investment diagram to explain what happens to saving,investment,and the real interest rate in each of the following scenarios in a closed economy.
(a)Current output rises due to a temporary productivity increase.
(b)The tax code changes so that business firms face higher tax rates on their revenue (offset by other lump-sum tax changes so there's no overall change in tax revenue).
(c)The government increases spending temporarily for a one-year project to turn mercury into gold.
(d)The average educational level rises,inducing an increase in the future marginal productivity of capital.

Accepted Answer

The answer of Use a saving-investment diagram to explain what...

Question 16

An invention that raises the future marginal product of capital (in a closed economy)would cause an increase in desired investment,which would cause the investment curve to shift to the ________ and would cause the real interest rate to ________.

Accepted Answer

An invention that raises the future marginal product of capital would make investment more profitable, so desired investment would increase. This would cause the investment curve to shift to the right, as firms would want to invest more at any given interest rate. As a result, the real interest rate would increase to equilibrate the increased demand for investment with the limited supply of savings.

Question 17

An increase in the expected real interest rate tends to

Accepted Answer

An increase in the expected real interest rate raises the cost of borrowing for businesses, which lowers their desired investment. At the same time, higher interest rates incentivize households to save more, which raises their desired saving. Therefore, both factors push in opposite directions, but the net effect is that an increase in the expected real interest rate raises desired saving but lowers desired investment, making choice D the correct answer.

Question 18

A curve that connects all the consumption combinations that yield the same level of utility is known as

Accepted Answer

An indifference curve connects all the consumption combinations that yield the same level of utility for an individual. Isoquant is a curve that connects all the combinations of two inputs that will produce a certain level of output, budget line shows the consumption combinations that are affordable given the consumer's income and the prices of goods, and yield curve shows the relationship between the interest rate and the time to maturity for a set of similar securities.

Question 19

The saving-investment diagram shows that a higher real interest rate due to a leftward shift of the saving curve

Accepted Answer

A leftward shift of the saving curve implies that for any given interest rate, there is less saving available. This typically leads to a higher equilibrium interest rate, which makes borrowing more expensive. As a result, firms are likely to invest less because the cost of financing investment has increased. Additionally, the higher interest rate discourages some saving, leading to a decrease in both saving and investment in the economy.

Question 20

If the government reduces the effective tax rate on capital (in a closed economy),then the real interest rate ________ and saving ________.

Accepted Answer

Reducing the effective tax rate on capital typically encourages investment, which increases the demand for loanable funds, leading to a rise in the real interest rate. Additionally, the lower tax rate on returns to saving can incentivize individuals to save more, thus increasing saving.

Quiz 4: Consumption, Saving, and Investment

If consumers believe that next year a recession will occur (in a closed economy) ,then the real interest rate and investment .

The substitution effect of a decrease in real interest rates is to cause a consumer to

A temporary supply shock,such as a drought,would

If consumers foresee future taxes completely,a reduction in taxes this year that is accompanied by an offsetting increase in future taxes would cause

Suppose the government provides a tax cut today that is matched by a tax increase in the future that's equal in present value to the tax cut.This causes a consumer's saving to

David consumes 200 in the current period and 330 in the future period.The real interest rate is 10% per period.David's present value of lifetime consumption is

Onerous regulations on businesses that take effect next year (in a closed economy) reduce businesses' expected future marginal product of capital.As a result,the real interest rate and saving .

If Claudette gets a permanent increase in her income of $1000 per year,she saves an extra $200 this year and consumes an extra $800 this year.If the increase in income had been temporary instead of permanent,she would have saved ________ of the extra income.

A temporary decrease in government purchases would cause

If the stock market booms and people feel wealthier (in a closed economy) ,then the real interest rate and investment .

Any change in the economy that raises desired national saving for a given value of the real interest rate will shift the desired national saving curve to

An invention that raises the future marginal product of capital (in a closed economy) would cause an increase in desired investment,which would cause the investment curve to shift to the and would cause the real interest rate to .

An increase in the expected real interest rate tends to

A curve that connects all the consumption combinations that yield the same level of utility is known as

The saving-investment diagram shows that a higher real interest rate due to a leftward shift of the saving curve

If the government reduces the effective tax rate on capital (in a closed economy) ,then the real interest rate and saving .

Quiz 4: Consumption, Saving, and Investment

If consumers believe that next year a recession will occur (in a closed economy) ,then the real interest rate ________ and investment ________.

The substitution effect of a decrease in real interest rates is to cause a consumer to

A temporary supply shock,such as a drought,would

If consumers foresee future taxes completely,a reduction in taxes this year that is accompanied by an offsetting increase in future taxes would cause

Suppose the government provides a tax cut today that is matched by a tax increase in the future that's equal in present value to the tax cut.This causes a consumer's saving to

David consumes 200 in the current period and 330 in the future period.The real interest rate is 10% per period.David's present value of lifetime consumption is

Onerous regulations on businesses that take effect next year (in a closed economy) reduce businesses' expected future marginal product of capital.As a result,the real interest rate ________ and saving ________.

If Claudette gets a permanent increase in her income of $1000 per year,she saves an extra $200 this year and consumes an extra $800 this year.If the increase in income had been temporary instead of permanent,she would have saved ________ of the extra income.

A temporary decrease in government purchases would cause

If the stock market booms and people feel wealthier (in a closed economy) ,then the real interest rate ________ and investment ________.

Any change in the economy that raises desired national saving for a given value of the real interest rate will shift the desired national saving curve to

An invention that raises the future marginal product of capital (in a closed economy) would cause an increase in desired investment,which would cause the investment curve to shift to the ________ and would cause the real interest rate to ________.

An increase in the expected real interest rate tends to

A curve that connects all the consumption combinations that yield the same level of utility is known as

The saving-investment diagram shows that a higher real interest rate due to a leftward shift of the saving curve

If the government reduces the effective tax rate on capital (in a closed economy) ,then the real interest rate ________ and saving ________.

If consumers believe that next year a recession will occur (in a closed economy) ,then the real interest rate and investment .

Onerous regulations on businesses that take effect next year (in a closed economy) reduce businesses' expected future marginal product of capital.As a result,the real interest rate and saving .

If the stock market booms and people feel wealthier (in a closed economy) ,then the real interest rate and investment .

An invention that raises the future marginal product of capital (in a closed economy) would cause an increase in desired investment,which would cause the investment curve to shift to the and would cause the real interest rate to .

If the government reduces the effective tax rate on capital (in a closed economy) ,then the real interest rate and saving .