Chapter 3 MC

share of output

Y = AK^alpha L^1-alpha the share is the exponents

Private saving is:

disposable income minus consumption. (Y-T)-C

The investment function slopes _____ because there are _____ investment projects that are profitable as the interest rate decreases.

downward; more

The government raises lump-sum taxes on income by $100 billion, and the neoclassical economy adjusts so that output does not change. If the marginal propensity to consume is 0.6, private saving:

falls by $40 billion

Crowding out occurs when an increase in government spending _____ the interest rate and investment _____.

increases, decreases

Assume that consumption does not depend on the interest rate. Holding other things constant, when the government lowers taxes on business investment, thus increasing investment demand, the quantity of investment:

is unchanged and the real interest rate rises.

In the classical model with fixed income, if households and the government want to save more than firms want to invest, then:

the real interest rate falls.

rental rate

derivative with respect to capital so if Y = K^0.5 L^0.5 dY/dK = 0.5 K^-0.5 L^0.5 = 0.5(L/K)^0.5 then you plug in your units of land and labor

wage rate

derivative with respect to labor so if Y = K^0.5 L^0.5 dY/dL = 0.5 K^0.5 L^-0.5 = 0.5(K/L)^0.5 then you plug in your units of land and labor

Assume that an increase in consumer confidence raises consumers' expectations of future income and thus the amount they want to consume today for any given level of disposable income. This shift, in a neoclassical economy, will do what to the investment and interest rate?

lower investment and raise the interest rate.

The economy begins in equilibrium at point E, representing the real interest rate r1 at which saving S1 equals desired investment I1. What will be the new equilibrium combination of real interest rate, saving, and investment if there is a technological innovation that increases the demand for investment goods?

point B

National saving is:

private saving plus public saving national savings also equals the interest rate

Public savings is:

taxes minus government spending

In the classical model with fixed output, the supply and demand for goods and services are balanced by:

the interest rate.