Question

1. If the Canadian government decreases the governmental expenditures, then in the market for loanable funds

Select one:

a. The real interest rate increases and the investment decreases

b. The real interest rate decreases and the investment increases

c. The real interest rate increases and the investment increases

d. The real interest rate decreases and the investment decreases

2. Suppose that the disposable income increases by 10 units, how much is the change in the consumption level if the Consumption function is described as follows:

C = 200 + 0.8(Y-T)

Select one:

a. 208

b. not enough information to provide the answer

c. 8

d. the answer would depend on the tax amount

Answer 1

1.

When the Canadian government cuts its spending, then aggregate demand decrease because government spending is part of aggregate demand. So AD curve shifts leftward. So price level decrease in the economy, so real money supply increase in the economy. As a result, the money supply curve shifts rightward. As a result, real interest rate decrease. This leads to an increase in the investment because now borrowing has become cheaper. So the investment will increase.

Hence it can be said that if the Canadian government decreases the governmental expenditures, then in the market for loanable funds the real interest rate decreases, and the investment increases.

Hence option b is the correct answer.

2.

The given production function is

C = 200 + 0.8(Y-T)

The (Y-T) is the disposable income, so when disposable income increase by 10 units, then consumption level will change by= 0.8*(Y-T)

=0.8*10

=$8

Hence option c is the correct answer.