ECON 2020U Study Guide - Final Guide: Nominal Interest Rate, Loanable Funds, Real Interest Rate

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28 Feb 2015

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Chapter 10 saving, investment spending, and the financial system. Savings investment spending identity: savings and investment spending are always equal for the economy as a whole. Budget surplus: excess of tax revenue over government spending. Budget deficit: excess of government spending over tax revenue. Budget balance: the difference between tax revenue and government spending. National savings: the sum of private savings and the budget balance (the total amount of savings generated within the economy). It"s important to stay clear about the different kinds of capital (as explained in the previous chapter): physical capital consists of manufactured resources, such as buildings and machines. Human capital is the improvement in the labor force generated by education and knowledge: financial capital is funds from savings that are available for investment spending. Net capital inflow is the total flow of funds into a country minus the total flow of funds out of a country.

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Assume the following values of an economy.

Planned Investment (Ip) = $20

Autonomous Consumption (C ) = $30

Marginal Propensity to consume (MPC) = .9

What is the equilibrium income?

Y* = aggregate demand at the equilibrium level. (Consumption + investment)

Consumption function = autonomous consumption + mpc * Y.

C=30 + .9Y

AD = 30 + .9Y + 20 = 50 + .9Y

Y= 50 + .9Y.1Y = 50

Y = $500 is the equilibrium level of income.

What is the value of saving at equilibrium?

Savings = income - consumption at the equilibrium level of Y=500,

Consumption = 30 +.9 * 500 = $480

Savings = 500 - 480= 20

c. Does the saving and Investment Identity hold true at equilibrium income OR GDP?

Since planned investment = $20 which is equal to savings calculated, the saving investment identity holds true at equilibrium income.

2. In addition to the values given in question (1) above, assume the government increases its spending by $30 without raising taxes. The government can do this by borrowing from the private sector.

a. Based on this information calculate the new level of equilibrium income.

If Government expenditures = $30, Y = C + I + G

Y = 1/1-.09 * (30+20+30) Y = 800

b. Calculate the total value of consumption at equilibrium.

C = 30 + .9(800) = 750

c. Calculate the total value of saving at equilibrium.

Savings = I - C = 800 - 750 = 50

3. In addition to questions in (1 & 2) above, assume the government decides to raise autonomous taxes by $30 to balance its budget.

What is the new value of equilibrium income?

Y = 1/1-.9 (30-.9(30) +20+30) = 530

What is the value of the autonomous tax multiplier?

-.09/.01 = -9

c. What is the value of autonomous spending multiplier?

1/.1 = 10

ochrewildebeest111

6. To study the macroeconomy we must combined prices and quantities generated in single-product markets into broad aggregates.

a)	True
b)	False

7. An economist who favored expanded government would recommend:

a)	tax cuts during recession and tax increases during inflation
b)	tax increases during recession and tax cuts during inflation.
c)	tax cuts during both recession and inflation
d)	increases in government spending during a recession and tax increases during inflation.
e)	tax cuts during recessions and reduction in government spending during inflation.

8. If Government tax revenue exceeds Government spending the result of the budget is

a)	an increase in investment
b)	a shortage
c)	an increase in the deficit
d)	a decrease in savings
e)	a surplus

9. Which of the following statements is true?

a)	In the US economy, the net export sector is positive.
b)	Aggregate demand is the sum of total output produced by all firms in the US.
c)	The aggregate supply curve is vertical if the price level is equal to the per-unit cost of production
d)	Aggregate production sums up the four major components C+I+G+Xn in the US economy.
e)	Government spending is the largest component of aggregate demand.

10. Which of the following statements is true?

	a) When unemployment is rising then real GDP is rising.
b)	The required reserve ratio is a tool used by the government to control the demand for money.
c)	The four components of aggregate supply are the same as aggregate demand.
d)	when an imported resource such as oil has decreased that is an increase in aggregate demand.
e)	The four components of aggregate demand---Households, Business, Government, and Net Exports.

reddeer204

Assume the following values of an economy.

Planned Investment (Ip) = $20

Autonomous Consumption (C ) = $30

Marginal Propensity to consume (MPC) = .9

a. What is the equilibrium income?

b. What is the value of saving at equilibrium?

c. Does the saving and Investment Identity hold true at equilibrium income OR GDP?

2. In addition to the values given in question (1) above, assume the government increases its spending by $30 without raising taxes. The government can do this by borrowing from the private sector.

a. Based on this information calculate the new level of equilibrium income.

b. Calculate the total value of consumption at equilibrium.

c. Calculate the total value of saving at equilibrium.

3. In addition to questions in (1 & 2) above, assume the government decides to raise autonomous taxes by $30 to balance its budget.

a. What is the new value of equilibrium income?

b. What is the value of the autonomous tax multiplier?

c. What is the value of autonomous spending multiplier?

4. In addition to the value in questions (1, 2 & 3), assume the following values.

Autonomous export (Xa) = $30

Autonomous import (Ma) = $10

Marginal propensity to import = 0.1

a. What is the new value of equilibrium income?

b. What is the value of total consumption of domestically produced good at equilibrium?

c. What is the value of the trade surplus or deficit at equilibrium?

d. What is the value of the marginal propensity to consume domestically produced goods?

e. What is the value of capital inflow or outflow

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ECON 2020U Study Guide - Final Guide: Nominal Interest Rate, Loanable Funds, Real Interest Rate

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