Question

In: Economics

1. Your current income is equal to 50 000 When your income changes by 12,500, your...

Your current income is equal to 50 000 When your income changes by 12,500, your consumption expenditure changes by 7,500.

What is the value of the marginal propensity to consume

(MPC)?

MPC =________(enteryour response rounded to one or two decimal places as

appropriate).

What is the difference between gross investment and net investment? Can gross investment be positive when net investment isnegative?

A.The difference is equal to depreciated capital; No.

B.Gross investment is the overall increase in the capital stock; No.

C.Gross investment is the overall increase in the capital stock;Yes

D.Net investment is the overall increase in the capital stock;Yes.

Define the expected real after-tax interest rate.

A.[(1−tax rate)×real interest rate]−expected inflation rate.

B.[(1−tax rate)×nominal interest rate]+expected inflation rate.

C.[(1−tax rate)×nominal interest rate]−expected inflation rate.

D.(1−tax rate)×nominal interest rate.

If the tax rate on interest income declines, what happens to the expected real after-tax interest rate?

A.It decreases.

B.It increases.

C.It remains constant.

D.It is ambiguous.

Explain why the saving curve slopes upward in the saving-investment diagram.

A.Higher interest rates provide higher returns for savers and also a higher opportunity cost of current consumption.

B.Higher interest rates provide an incentive for individuals to consume more in the present and future.

C.Higher interest rates lead to increased government purchases.

D.Higher interest rates reduce the opportunity cost of future consumption activity.

Explain why the investment curve slopes downward in the saving-investment diagram.

A.Higher interest rates increase the user cost of capital thus reducing the desired capital stock.

B.Higher interest rates increase the gap between gross and net investment.

C.Higher interest rates reduce the productivity of capital thus reducing the desired capital stock.

D.Higher interest rates lead to an increase in the per-unit price of capital.

Given the following:

Output (Y) : 2,000

Government Spending (G): 200

Desired Consumption (Cd): 1,800

Real interest rate: 3%

If the level of desired investment is equal to 200,

the real interest rate is likely to __________(increase, decrease or unchanged)

Solutions

Expert Solution

1) Your current income is equal to 50 000 When your income changes by 12,500, your consumption expenditure changes by 7,500. What is the value of the marginal propensity to consume (MPC)?

MPC = 0.60

Explanation: MPC = 7,500/12,500

2) What is the difference between gross investment and net investment? Can gross investment be positive when net investment is negative?

Solution: Net investment is the overall increase in the capital stock;Yes.

Explanation: Gross investment refers to the total purchase or construction of new capital goods that takes place during a defined time frame. Net investment is gross investment less the depreciation on existing capital. Hence net investment is the overall increase in the capital stock. Yes,the gross investment to be positive when net investment is negative. It happens whenever the amount of depreciation exceeds gross investment.

3) Define the expected real after-tax interest rate

Solution: [(1- tax rate)*nominal interest rate]-expected inflation rate.

Working: [(1- tax rate)*nominal interest rate]-(3.14^e)

4) Explain why the saving curve slopes upward in the saving-investment diagram.

Solution: higher interest rates provide higher returns for savers and also a higher opportunity cost of current consumption

Explanation: As saving is assumed to increase with an increase in the expected real interest rate thus saving curve slopes upward

5) Explain why the investment curve slopes downward in the saving-investment diagram.

Solution: higher interest rates increase in the user cost of capital thus reducing the desired capital stock

Explanation: The investment curve slopes downward because the higher is the expected real interest rate and the investment is lower

Rahul Sunny answered 1 year ago

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1. Your current income is equal to 50 000 When your income changes by 12,500​, your...

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