Exam 7: The Spending Allocation Model

Answer the questions below: (A)Some argue that Japan's saving rate is too high. Suppose all Japanese citizens decide to save at a lower rate. Show what happens in this case in the saving and investment diagram where the S/Y curve shifts. (B)Now show the same situation in the C/Y, I/Y, and X/Y diagrams. Which curve shifts? If the government share of GDP does not change, then what must happen to interest rates? Explain how this affects the four shares. (C)Suppose that when the Japanese citizens began saving at a lower rate, the government reduced its level of spending, and the government share of GDP fell. Illustrate the effect on the interest rate using the saving-investment approach and the four-diagram approach in parts (A) and (B). What happens to the four shares of GDP?

If state governments decide to cut both taxes and government spending, what will happen to the national saving rate and interest rates?

In the spending allocation model, the government share of GDP is assumed to be unaffected by the real exchange rate, being instead directly determined by government officials.

Suppose the C/Y line shifts to the right because of a change in attitude about the future. At the same time, because of political pressure, the government share of GDP declines, with the result that the interest rate stays constant. (A)If the investment share is the only thing that affects growth in the system, what will happen to growth? (B)If the consumption share increased by 5 percent, what must have happened to the government share? (C)Suppose that when the C/Y line shifted to the right and the government cut spending, the interest rate actually fell. What happened to each of the four shares in this case?

The sum of the consumption, investment, and net exports shares of GDP is called

A decrease in real interest rates will cause

Which of the following statements is true?

If net exports become less sensitive to changes in exchange rates, the crowding-out effect of government spending will increase.

The spending allocation pertains to the long run because

The decline in investment due to an increase in government purchases is called crowding out.

Suppose foreign demand for U.S. products increases. (A)Use the saving-investment approach to show what happens to the long-run interest rate. (B)Use the four-diagram approach to show what happens to the long-run interest rate. (C)What happens to the four shares of GDP?

If the dollar gets stronger because international investors have more confidence in the U.S. economy, then the share of net exports line will shift to the right.

Which of the following is an appropriate definition of the national saving rate?

The interest rate that pertains to the spending allocation model is the

To understand how the shares of GDP are allocated in a market economy, which of the following factors needs to be understood?

The four-diagram approach explains how the price level adjusts in the long run so that the shares of GDP sum to 1.

According to most estimates, the real interest rate was higher in the 1980s than in the 1970s.

The consumption share line is

The investment share of GDP is expressed as

Which of the following statements is the most accurate about the spending allocation model?