Macroeconomics CH 3

In a closed economy with fixed output, when government spending increases:

public saving decreases

If income is 4800, consumption is 3500, government spending is 1000 and taxes minus transfer are 800, private saving is equal to:

500

According to the model developed in Chapter 3, when government spending increases

consumption and investment both decrease

The demand for output in a closed economy is the sum of:

consumption, investment and government spending

(Exhibit: Saving, investment, and the Interest Rate 1) 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 the government cuts spending, golding other factors constant?

Point B

In the neoclassical model with fixed income, if there is a decrease in taxes with no change in government spending, then public saving___and private saving___.

decreases; increases

A consumption function shows the relationship between consumption and:

disposable income

Private saving is:

disposable income minus consumption

public saving is:

either positive, negative, or zero

The government spending component of GDP includes all of the following except:

federal spending on transfer payments

In the classical model with fixed income, if the interest rate is too low, then investment is too___and the demand for output____the supply

high; exceeds

In a closed economy, Y-C-G equals:

national saving

In equilibrium, total incestment equals:

national saving

The supply of loanable funds is equivalent to:

national saving

Other things equal, an increase in the interest rate leads to:

a decrease in the quantity of investment goods demanded

Investment goods as measured in the GDP are purchased by:

business firms and households

According to the model developed in Chapter 3, when taxes are increased but government spending is unchanged, interest rates:

decrease

In the classical model with fixed income, if the demand for goods for goods and services is greater than the supply, the interest rate will:

decrease

Consumption depends positively on___ and investment depends negatively on ___.

disposable income; the real interest rate

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 .6, private saving:

falls by $40 billion

Public saving is:

government revenue minus government spending

National saving refers to:

income minus consumption minus government spending

According to the model developed in Chapter 3, when government spending increases but taxes are not raised, interest rates:

increase

In the classical model with fixed income, if the demand for goods and services is greater than the supply, the interest rate will:

increase

When government spending increases and taxes are increased by an equal amount, interest rates:

increase

In the classical model with fixed income, an increase in the real interest rate could be the result of a(n):

increase in government spending

Crowding out occurs when an increase in government spending____the interest rate and investment___:

increase; decrease

In the neoclassical model with fixed income, if there is a decrease in government spending with no change in taxes, then public saving___and private saving____.

increases; does not change

The demand for loanable funds is equivalent to:

investment

According to the model developed in Chapter 3. when government spending increases without a change in taxes:

investment decreases

In the neoclassical economy, assume that the government lowers both government spending and taxes by the same amount. By doing do:

investment rises and the interest rate falls

The demand for the economy's output:

is equal to consumption, investment, and government purchases

When the demand for loanable funds exceeds the supply of loanable funds, households want to save____than firms want to invest and the interest rate___

less;rises

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 income. This shift, in a neoclassical economy, will:

lower investment and raise the interest rate

In the classical model with fixed income, a reduction in the government budget deficit will lead to a:

lower real interest rate

The marginal propensity to consume is:

normally expected to be between zero and one.

Consumption depends ___ on disposable income, and investment depends ___ on the real interest rate

positively; negatively

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 .6, public saving:

rises by $100 billion

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 .6, national saving:

rises by $60 billion

Disposable personal income is defined as income after payment of all:

taxes

The equation Y=C(Y-T)+I(r)+G may be solved for the equilibrium of.

the interest rate

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

the interest rate falls

If disposable income is 4000, consumption is 3500, government spending is 1000 and taxes minus transfer are 800, national saving is equal to:

300

In the classical model with fixed income, a decrease in the real interest rate could be the result of a(n):

increase in taxes

National saving is:

private plus public saving

The supply and demand for loanable funds determines the:

real interest rate

In the neoclassical economy, assume that the government lowers both government spending and taxes by $100 billion. If the marginal propensity to consume is .6, investment will:

rise $40 billion

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 .6, investment:

rises by $60 billion

In the classical model with fixed output, the supply and demand for goods and services.

the interest rate

The factor that makes national saving equal investment, in equilibrium, is:

the interest rate

In a closed economy, private saving equals:

Y-T-C

If income is 4800, consumption is 3500, government spending is 1000 and taxes minus transfer are 800, public saving is equal to:

-200

Assume that a firm wants to build a factory that will cost $600,000 in one year and then can sell the used factory for its original cost. The rate of return on this investment would be:

12 percent

According to the model developed in Chapter 3, when taxes decrease without a change in government spending:

consumption increases and investment decreases

In examining the impact of fiscal policy, it is assumed that:

consumption, investment, and the interest rate are endogenous variables

The reduction in investment brought about by the increase in the interest rate caused by increased government spending is called:

crowding out.

(Exhibit: Saving, investment, and the Interest Rate 1) 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 the government cuts taxes, holding other factors constant?

Point A

(Exhibit: Saving, investment, and the Interest Rate 1) 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 the government increases spending, holing other factors constant?

Point A

(Exhibit: Saving, investment, and the Interest Rate 1) 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 the government raises taxes, holing other factors constant?

Point B

In the classical model with fixed income, if the interest rate is too high, then investment is too___and the demand for output____the supply

low; falls short of