Macroeconomics<\/p>\n
18 mutiple choices, and 3 essay quetions about market for loanable funds and investment crowding out.<\/p>\n
Part A: Essay questions (64 points)
\n1. Suppose that a drop in consumer confidence lowers household\ufffd\ufffd\ufffds consumption but stimulates private savings and overall national savings. This increase in the supply of loanable funds (a supply shift) affects investment in capital goods (I) differently depending on the responsiveness of the supply of funds to interest rate. Under which of the following two assumptions would this increase in savings (S) encourage investment (I) the most? Support your answer with the graph below. (20 points)
\nAssumption 1:\tThe supply of loanable funds is not responsive to interest rates –
\nAssumption 2:\tThe supply of loanable funds is strongly responsive to interest rates – S2(r)
\nr
\n\t\t\t\t\t\t S2(r)<\/p>\n
\t\t\t\t\t\t I(r)<\/p>\n
\t\t\t\t\t\t\t\tQuantity of loanable funds<\/p>\n
Explanation
\n2. A) Under which of the following two assumptions (about the responsiveness of investment to interest rate) would an exogenous decrease in government spending (G) encourage private investment (I) the most? Explain and support your answer with the graph below. (15 points)
\nAssumption 1:\tThe demand for loanable funds (I1) is strongly responsive to real interest rate (r).
\nAssumption 2:\tThe demand for loanable funds (I2) is weakly responsive to real interest rate (r).<\/p>\n
Graph – Draw the impact of a decrease in G on I under both assumptions. Label I1 and I2 appropriately.
\n r \t\t\t\t\tS(r)<\/p>\n
\t\t\t\t\t\tQ of loanable funds
\nExplanation<\/p>\n
B) If the supply of loanable funds were vertical, would your choice of assumption from part (A) be the same? Use the graph below for the market for loanable funds with S vertical and the same two demand of loanable funds I1 and I2 to explain. (15 points)
\n r \t\t\tS<\/p>\n
\t\t\t\t\t\tQ of loanable funds
\nExplanation<\/p>\n
3\t\t3. Explain whether the following italicized statement is true or false. Assume the supply of loanable fund is vertical. Explain (1), (2) and (3) individually. (14 points)
\n\t\tOther things the same, if the government increases transfer payments to households, then (1) investment will increase, (2) the rate of interest will rise, (3) public saving will fall by more than private saving will increase.<\/p>\n
Part B: Report your answers to the multiple choice questions in this table (36 points; 2 points each)
\nThe multiple choice questions are on pages 5 to 7.
\n1.\t4.\t7.\t10.\t13.\t16.
\n2.\t5.\t8.\t11.\t14.\t17.
\n3.\t6.\t9.\t12.\t15.\t18.
\nPart B: Multiple choice questions. Report your answers to the multiple choice questions in the table p. 4.<\/p>\n
1.\tIf the consumption function is given by C = 0.75(Y \ufffd\ufffd\ufffd T) and T decreases by $100 billion, then private saving _________, public saving _________, hence national saving______:
\nA)\tdecreases by $25 billion; increases by $100 billion; increases by $75 billion.
\nB)\tdecreases by $25 billion; decreases by $100 billion; decreases by $125 billion.
\nC)\tincreases by $25 billion; decreases by $100 billion; decreases by $75 billion.
\nD)\tincreases by $25 billion; increases by $100 billion; increases by $125 billion.<\/p>\n
2.\tWhen economists speak of \ufffd\ufffd\ufffdthe\ufffd\ufffd\ufffd interest rate, they mean:
\nA)\tthe rate on 90-day Treasury bills.
\nB)\tthe rate on 30-year government bonds.
\nC)\tthe \ufffd\ufffd\ufffdprime\ufffd\ufffd\ufffd rate on loans.
\nD)\tno particular interest rate, since it is assumed that various interest rates tend to move up and down together.<\/p>\n
3.\tWhen the demand for loanable funds is less than the supply of loanable funds, households want to save ______ than firms want to invest and the interest rate ______.
\nA)\tmore; rises
\nB)\tmore; falls
\nC)\tless; rises
\nD)\tless; falls<\/p>\n
4.\tAssume that equilibrium GDP (Y) is 5,000. Consumption (C) is given by the equation C = 500 + 0.6(Y \ufffd\ufffd\ufffd T). Net taxes (T) are equal to 600. Government spending is equal to 1,000. Investment is given by the equation I = 2,160 \ufffd\ufffd\ufffd 100r, where r is the real interest rate in percent. In this case, the equilibrium real interest rate is:
\nA)\t5 percent.
\nB)\t8 percent.
\nC)\t10 percent.
\nD)\t13 percent.
\n5.\tWhen net taxes decrease without a change in government spending (assume C is not function of real interest rates):
\nA)\tconsumption and investment both increase.
\nB)\tconsumption and investment both decrease.
\nC)\tconsumption increases and investment decreases.
\nD)\tconsumption decreases and investment increases.<\/p>\n
6.\tWhen government spending increases and net taxes increase by an equal amount (assume C is not function of real interest rates):
\nA)\tconsumption and investment both increase.
\nB)\tconsumption and investment both decrease.
\nC)\tconsumption increases and investment decreases.
\nD)\tconsumption decreases and investment increases.<\/p>\n
7.\tIf there is a decrease in government spending with no change in net taxes, then public saving ______ and private saving ______. Assume consumption (or private saving) is not function of real interest rates.
\nA)\tincreases; increases.
\nB)\tincreases; does not change
\nC)\tdecreases; increases
\nD)\tdecreases; does not change
\n8.\tAn increase in the government budget deficit will lead to a:
\nA)\thigher real interest rate and lower national debt.
\nB)\tlower real interest rate and lower national debt.
\nC)\thigher real interest rate and higher national debt.
\nD)\tlower interest rate and higher national debt.
\n 9. When government spending decreases and net taxes are decreased by an equal amount (assume C is not function of real interest rates), interest rates:
\nA)\tincrease.
\nB)\tremain the same.
\nC)\tdecrease.
\nD)\tcan vary wildly.
\n10.\tAssume that consumption does not depend on the interest rate. In this case, when there is a technological advance that leads to an increase in investment demand:
\nA)\tinvestment increases and the interest rate rises.
\nB)\tinvestment is unchanged and the interest rate rises.
\nC)\tinvestment and the interest rate are both unchanged.
\nD)\tinvestment increases and the interest rate falls.
\n11.\tAssume that consumption decreases, other things being equal, when the interest rate rises. If there is a technological advance that leads to an increase in investment demand:
\nA)\tinvestment increases and the interest rate rises.
\nB)\tinvestment is unchanged and the interest rate rises.
\nC)\tinvestment and the interest rate are both unchanged.
\nD)\tinvestment decreases and the interest rate rises.<\/p>\n
12. An increase in the real interest rate could be the result of a(n):
\n\tA)\tincrease in government spending.
\n\tB)\tdecrease in taxes.
\n\tC)\tincrease in investment.
\n\tD)\tA, B and C are correct.
\n \t E)\tA and C are correct.
\n 13. Investment goods as measured in the GDP are purchased by:
\n A)\tbusiness firms alone.
\n B)\thouseholds alone.
\n C)\tbusiness firms and households.
\n D)\tbusiness firms, households, and governments.
\n14. If there is a tax law change that makes investment projects less profitable and decreases the demand for investment goods, but does not change the amount of taxes collected in the economy, then interest rate
\nA)\tfalls.
\nB)\tincreases.
\nC)\tis unchanged.
\nD)\tmay or may not change, it\ufffd\ufffd\ufffds impossible to say.<\/p>\n
15. Crowding out occurs when an increase in government spending ____ the interest rate and investment _____.
\nA)\tincreases; increases.
\nB)\tincreases; decreases.
\nC)\tdecreases; increases.
\nD)\tdecreases; decreases.<\/p>\n
16. Assume that an increase in consumer confidence raises consumers\ufffd\ufffd\ufffd expectations of future income and thus the amount they want to consume today for any given income. This shift will:
\nA)\tlower investment and raise the interest rate.
\nB)\traise investment and lower the interest rate.
\nC)\tlower both investment and the interest rate.
\nD)\traise both investment and the interest rate.<\/p>\n
17. The government spending component of GDP includes all of the following except:
\nA)\tfederal spending on goods.
\nB)\tstate and local spending on goods.
\nC)\tfederal spending on transfer payments.
\nD)\tfederal spending on services.<\/p>\n
18. Suppose that GDP (Y) is 5,000. Consumption (C) is given by the equation C = 500 + 0.5(Y-T). Investment (I) is given by the equation I = 2,000 \ufffd\ufffd\ufffd 100r, where r is the real interest rate in percent. Government spending (G) is 1,000 and net taxes (T) is also 1,000. When a technological innovation changes the investment function to
\nI = 3,000 \ufffd\ufffd\ufffd 100r:
\nA)\tI rises by 1,000 and r rises by 10 percentage points.
\nB)\tI rises by 1,000 and r is unchanged.
\nC)\tI is unchanged and r rises by 10 percentage points.
\nD)\tI is unchanged and r rises by 15 percentage points.<\/p>\n","protected":false},"excerpt":{"rendered":"
Macroeconomics 18 mutiple choices, and 3 essay quetions about market for loanable funds and investment crowding out. Part A: Essay questions (64 points) 1. Suppose that a drop in consumer confidence lowers household\ufffd\ufffd\ufffds consumption but stimulates private savings and overall Read More …<\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-6692","post","type-post","status-publish","format-standard","hentry"],"_links":{"self":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/posts\/6692","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/comments?post=6692"}],"version-history":[{"count":0,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/posts\/6692\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/media?parent=6692"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/categories?post=6692"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/tags?post=6692"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}