Macrotheory ch. 3

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

Private saving is:

disposable income - consumption

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 doesn't 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

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:

lower investment and raise the interest rate

National saving is:

private + public saving

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

the interest rate