ECON 102 Chapter Notes - Chapter 3: Real Interest Rate, Fiscal Policy

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2 Apr 2020

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Why policies affect the trade balance: suppose the economy starts in a balance-trade position, that is, investment i is equal to saving s at the world interest rate, and net exports. Thus, saving falls below spending, and some investment now needs to be funded by borrowing from outside. Because nx = s i, the drop in s implies a drop in nx: currently, the country is running a trade deficit, the same principle applies to a tax reduction. Because nx = s i, the decrease in national saving falls nx: these results are shown in figure 5-3. A fiscal policy adjustment that raises private consumption c or public consumption g decreases national savings (y c g) and thus moves the vertical line from s1 to s2 which reflects savings. Since nx is the difference at the world interest rate between the saving schedule and the investment schedule, the change reduces nx.

Related Questions

1. The multiplier helps explain

A. why a decrease in taxes causes real Gross Domestic Product (GDP) to fall by more than the amount of the decrease in taxes.

B. why a fall in investment cause real Gross Domestic Product (GDP) to rise by more than the amount of the decrease in investment.

C. why a rise in government expenditures causes real Gross Domestic Product (GDP) to rise by more than the amount of the increase in government spending.

D. why an increase in disposable income causes real Gross Domestic Product (GDP) to rise by less than the amount of the increase in disposable income.

2. If the marginal propensity to save (MPS) increases, the multiplier

A. decreases.

B. can either increase or decrease, depending on what happens to the marginal propensity to consume (MPC).

C. stays the same.

D. increases.

QUESTION 60

The investment function will shift when there is a change in

		A. the opportunity cost of retained earnings.
		B. firms' profit expectations.
		C. the cost of borrowing.
		D. the interest rate.

1.43 points

QUESTION 61

In the Keynesian model, whenever planned saving exceeds planned investment,

		A. there will be unplanned inventory accumulation.
		B. real GDP will not be influenced.
		C. the interest rate will remain unchanged.
		D. there will be unplanned inventory depletion.

1.43 points

QUESTION 62

In the Keynesian model, whenever planned saving is less than planned investment,

		A. there will be unplanned inventory depletion.
		B. the interest rate will remain unchanged.
		C. there will be unplanned inventory accumulation.
		D. real GDP will not be influenced.

1.43 points

QUESTION 63

Government purchases

		A. are determined by the political process.
		B. are determined by the public.
		C. are influenced by interest rates.
		D. are determined by suppliers.

1.43 points

QUESTION 64

If, at some level of output, total planned real expenditures are less than real Gross Domestic Product (GDP),

		A. real GDP will either fall or remain unchanged, depending on the MPC.
		B. real GDP will rise.
		C. real GDP remains unchanged.
		D. unplanned inventories will increase and real GDP will fall.

1.43 points

QUESTION 65

When the economy is operating at the equilibrium level of GDP, we know that

		A. total planned real expenditures equal real GDP.
		B. real net exports equal inventory changes.
		C. planned real investment spending equals real net exports of zero.
		D. total planned real consumption expenditures equal real GDP.

1.43 points

QUESTION 66

One divided by the marginal propensity to save (MPS) is the formula for

		A. the inverse of the multiplier.
		B. the multiplier.
		C. one minus the multiplier.
		D. autonomous consumption.

QUESTION 67

Thinking like an economist would, which is true of investment?

		A. Investment represents spending on capital goods.
		B. Investment is a stock concept.
		C. Investment is putting money into stocks and bonds.
		D. It is the portion of disposable income that is not used for consumption or saving.

QUESTION 68

Other things being equal, if input prices rise in a country, then there would be

		A. cost-push inflation.
		B. demand-pull inflation.
		C. cost-pull deflation.
		D. more production and a lower price level.

QUESTION 69

In the short run, if the price level rises, then the overall economy can temporarily produce beyond its nominal capacity. One reason for this is that

		A. existing capital equipment can be used more intensively.
		B. wage rates rise almost simultaneously with the price level.
		C. the unemployment rate usually rises dramatically along with the price level.
		D. workers can be switched from counted to uncounted production.

fuchsiaclam197

Question 1 Assume a small scale French farmer sells 100,000 lbs. of milk to a French intermediary company for â¬2.00 per lbs. The intermediary company package the milk in fancy containers and sells it to Danone for â¬3.50 per lbs. Danone uses the milk to produce yogurt in its plant in Seville, Spain, Total output will be 6000 container and each container of yogurt for â¬5.75. How will this string of transactions affect French GDP? How will it affect French GNP? How will it affect Spanish GNP and GDP? Which will be more reflective of the true output for each economy? Explain

Question 2

Consider an open economy described by the following equations (all figures in millions of dollars): Y = C + I + G + NX Y = 8,000 (current value of output) G = 2,000 T = 1,000 + .1(Y) C = 450 + 0.75 (Y â T) I = 2,000 â 40 r NX = 700- 600É (É is the exchange rate) r = r* = 5 a) What is the current state of this economy in term of national saving, investment, the trade balance and the equilibrium exchange rate? b) Suppose government approve an infra structure investment which raises G to 2,250. How would this increase impact what you have calculated in (a) above? c) Now suppose that the world interest rate rises from 5 to 10 percent (G is again 2,000). Would the change in interest have the same impact on National saving and investment? Does it impact the exchange rate? Explain

ivorycheetah911

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

ECON 102 Chapter Notes - Chapter 3: Real Interest Rate, Fiscal Policy

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