Suppose that the interest rate increases. There are more lenders than borrowers in the economy, and the income effect is assumed to dominate the substitution effect. What is the aggregate effect of an increase in the interest rate on the optimal c, c0, and s?

c: current consumption

c0: future consumption

s: savings

answer

watching

views

For unlimited access to Homework Help, a Homework+ subscription is required.

You have 0 free answers left.
Get unlimited access to 3.8 million step-by-step answers.

Get unlimited access

Already have an account? Log in

Nusrat FatimaLv10

28 Sep 2019

Unlock all answers

Get 1 free homework help answer.

Already have an account? Log in

Related questions

Suppose the basic consumption level of Primaland is $10,000 million and that people save only 10% of their income. Government spending there is $5,000 million and the budget deficit is balanced while exports are $700 but Trade is balanced as well. The investment level is $6000 million; however, investment is independent of income and interest rate.

Aggregate Demand Z is defined as Z = C+I+G+(X-M) and the equilibrium condition is Y=Z.

The disposable income is Y_D=(Y-T).

Consumption is C=C₀+c₁Y_D and Investment is: I=I₀.

a. Set up the model for this economy.

b. Calculate and graph the equilibrium level of income for this economy.

c. What is the multiplier of this Economy?

d. What is the level of consumption at equilibrium?

e. What is the saving level if S= -C₀+0.1Y_D? What is it equal to?

Consumer confidence drops and people decide to "save" more or "consume" less by lowering their basic consumption to $8,000

f. What happens to the equilibrium Y = income and what happens to save, EXPLAIN.

azurearmadillo894

We have assumed that consumption depends only on disposable income. Now suppose that consumptions depend on both disposable income and the interest rate. As the interest rate increases, consumption decreases.

a. If consumption suddenly begins to depend on the interest rate, what is the effect on the slope of the IS curve?

b. Will this change make monetary policy more or less effective? Explain.

plumleopard250

When government spending increases, the first shift in the labor supply curve is due to a/an ____________ effect, and the second shift is due to a/an _____________ effect.

A. income; substitution

B. substitution; income

C. substitution; income

D. income;income

Consider the effects on current consumption due to an expected future increase in total factor productivity. The substitution effect follows from the change in _____________ and the income effect follows from the change in _____________.

A. the umemployment rate; the real wage rate

B. the real wage rate; the tax rate

C. the marginal product of labor; the marginal product of capital

D. the real interest rate; the consumer's lifetime weath.

Why does a future increase in total factor productivity affect current investment demand?

A. Because current captial decreases

B. Because the current marginal product of capital increases.

C. Because the future marginal product of capital increases

D. None of the above