Question 1

An increase in the real interest rate will shift the consumption share line to the left because there will be an incentive to save more and consume less.

Accepted Answer

A) True 
 B)False

Question 2

If a firm expects equipment prices to decline in the future, it will invest more today.

Accepted Answer

A) True 
 B)False

Question 3

Consumption is less sensitive than investment to changes in the real interest rate.

Accepted Answer

A) True 
 B)False

Question 4

The United States currently runs two large deficits, one on its budget account and one on its current account.

Accepted Answer

A) True 
 B)False

Question 5

If the government share of GDP equals 25 percent of GDP and the nongovernment share of GDP equals 80 percent of GDP, then

Accepted Answer

A)  interest rates will increase until the government share of GDP declines to 20 percent. 
B)  nothing will happen unless the government reduces its share of purchases. 
C)  interest rates will decrease, resulting in a decrease in the investment, consumption, and net export shares. 
D)  interest rates will increase, resulting in a decline in the investment, consumption, and net export shares. 
E)  GDP will increase, shrinking each share until the sum of all shares equals 1. 
A)  interest rates will increase until the government share of GDP declines to 20 percent. 
B)  nothing will happen unless the government reduces its share of purchases. 
C)  interest rates will decrease, resulting in a decrease in the investment, consumption, and net export shares. 
D)  interest rates will increase, resulting in a decline in the investment, consumption, and net export shares. 
E)  GDP will increase, shrinking each share until the sum of all shares equals 1.

Question 6

Answer the questions below:
(A)Using the diagram below, find the equilibrium interest rate when the government share is 25 percent. What is the investment share?
(B)Explain what happens to all of the variables if there is an increase in the demand for U.S. exports.

Accepted Answer

(A)When the government share of GDP is 2

Question 7

Which of the following would cause the national saving rate to decline for any given interest rate?

Accepted Answer

A)  A decline in consumer confidence 
B)  A decline in the government share of GDP 
C)  A decline in the investment tax credit 
D)  An increase in the level of wealth 
E)  An increase in the net export share of GDP 
A)  A decline in consumer confidence 
B)  A decline in the government share of GDP 
C)  A decline in the investment tax credit 
D)  An increase in the level of wealth 
E)  An increase in the net export share of GDP

Question 8

Explain why a continued stock market rally (that is, a continued increase in stock prices) will lead to an increase in consumption.

Accepted Answer

A rise in stock prices will in

Question 9

An increase in X does not affect the national saving rate schedule.

Accepted Answer

A) True 
 B)False

Question 10

Suppose the government share of GDP is 25 percent and the consumption, investment, and net export shares of GDP are 60, 12, and 3 percent, respectively. If the federal government introduces a national sales tax (a federal tax on consumption), then we would expect

Accepted Answer

A)  the government share of GDP to increase. 
B)  the interest rate to decrease. 
C)  the interest rate to increase. 
D)  the government share of GDP to decrease. 
E)  the net consumption share of GDP to increase. 
A)  the government share of GDP to increase. 
B)  the interest rate to decrease. 
C)  the interest rate to increase. 
D)  the government share of GDP to decrease. 
E)  the net consumption share of GDP to increase.

Question 11

To bring about an increase in the share of GDP available for nongovernment use,

Accepted Answer

A)  there will have to be a tax increase. 
B)  government purchases will have to decline. 
C)  interest rates will have to decline. 
D)  government purchases will have to increase. 
E)  interest rates will have to increase. 
A)  there will have to be a tax increase. 
B)  government purchases will have to decline. 
C)  interest rates will have to decline. 
D)  government purchases will have to increase. 
E)  interest rates will have to increase.

Question 12

Explain how increased investment in Eastern Europe as well as in other developing countries can result in a decline in U.S. investment. (Hint: What will happen to the demand for foreign currency by international investors relative to their demand for dollars?)

Accepted Answer

Demand for foreign currency will increas

Question 13

A decrease in the share of government purchases will ____ the share of GDP available for nongovernment purchases and ____ the interest rate in the long run.

Accepted Answer

A)  increase; increase 
B)  increase; have no effect on 
C)  increase; decrease 
D)  decrease; decrease 
E)  decrease; increase 
A)  increase; increase 
B)  increase; have no effect on 
C)  increase; decrease 
D)  decrease; decrease 
E)  decrease; increase

Question 14

The real interest rate is equal to the nominal interest rate minus an inflation premium.

Accepted Answer

A) True 
 B)False

Question 15

The government purchase share of GDP has no influence on the interest rate.

Accepted Answer

A) True 
 B)False

Question 16

A higher real interest rate today makes current consumption

Accepted Answer

A)  more expensive relative to future consumption because the return on savings is lowered. 
B)  more expensive relative to future consumption because the return on savings is increased. 
C)  less expensive relative to future consumption because the return on savings is increased. 
D)  less expensive relative to future consumption because the return on savings is lowered. 
E)  just as expensive as future consumption because the return on saving is uncertain. 
A)  more expensive relative to future consumption because the return on savings is lowered. 
B)  more expensive relative to future consumption because the return on savings is increased. 
C)  less expensive relative to future consumption because the return on savings is increased. 
D)  less expensive relative to future consumption because the return on savings is lowered. 
E)  just as expensive as future consumption because the return on saving is uncertain.

Question 17

Show that the nongovernment share of GDP influences only the interest rate and not the share of GDP available for nongovernment use.

Accepted Answer

In the figure below, SANG is the share o

Question 18

In a market economy, the interest rate adjusts to ensure equality among

Accepted Answer

A)  the investment, consumption, and net export shares of GDP and the share of GDP available for nongovernment use. 
B)  the investment, consumption, and net export shares of GDP and the government share of GDP. 
C)  the investment, consumption, and net export shares of GDP and GDP. 
D)  imports and exports. 
E)  the budget and trade deficits. 
A)  the investment, consumption, and net export shares of GDP and the share of GDP available for nongovernment use. 
B)  the investment, consumption, and net export shares of GDP and the government share of GDP. 
C)  the investment, consumption, and net export shares of GDP and GDP. 
D)  imports and exports. 
E)  the budget and trade deficits.

Question 19

National saving in 2010 was

Accepted Answer

A)  8.9 percent of GDP. 
B)  1.5 percent of GDP. 
C)  20.25 percent of GDP. 
D)  31.35 percent of GDP. 
E)  41.65 percent of GDP. 
A)  8.9 percent of GDP. 
B)  1.5 percent of GDP. 
C)  20.25 percent of GDP. 
D)  31.35 percent of GDP. 
E)  41.65 percent of GDP.

Question 20

Suppose the government share of GDP is 25 percent and the consumption, investment, and net export shares of GDP are 60, 12, and 3 percent, respectively. If, all else held constant, businesses become more optimistic about the benefits of investment, then

Accepted Answer

A)  investment spending as a share of GDP increases. 
B)  the nongovernment share of GDP remains constant. 
C)  the rate of interest increases. 
D)  the government share of GDP remains at 25 percent. 
E)  All of these 
A)  investment spending as a share of GDP increases. 
B)  the nongovernment share of GDP remains constant. 
C)  the rate of interest increases. 
D)  the government share of GDP remains at 25 percent. 
E)  All of these

Exam 7: The Spending Allocation Model

An increase in the real interest rate will shift the consumption share line to the left because there will be an incentive to save more and consume less.

If a firm expects equipment prices to decline in the future, it will invest more today.

Consumption is less sensitive than investment to changes in the real interest rate.

The United States currently runs two large deficits, one on its budget account and one on its current account.

If the government share of GDP equals 25 percent of GDP and the nongovernment share of GDP equals 80 percent of GDP, then

Answer the questions below: (A)Using the diagram below, find the equilibrium interest rate when the government share is 25 percent. What is the investment share? (B)Explain what happens to all of the variables if there is an increase in the demand for U.S. exports.

Which of the following would cause the national saving rate to decline for any given interest rate?

Explain why a continued stock market rally (that is, a continued increase in stock prices) will lead to an increase in consumption.

An increase in X does not affect the national saving rate schedule.

Suppose the government share of GDP is 25 percent and the consumption, investment, and net export shares of GDP are 60, 12, and 3 percent, respectively. If the federal government introduces a national sales tax (a federal tax on consumption), then we would expect

To bring about an increase in the share of GDP available for nongovernment use,

Explain how increased investment in Eastern Europe as well as in other developing countries can result in a decline in U.S. investment. (Hint: What will happen to the demand for foreign currency by international investors relative to their demand for dollars?)

A decrease in the share of government purchases will ____ the share of GDP available for nongovernment purchases and ____ the interest rate in the long run.

The real interest rate is equal to the nominal interest rate minus an inflation premium.

The government purchase share of GDP has no influence on the interest rate.

A higher real interest rate today makes current consumption

Show that the nongovernment share of GDP influences only the interest rate and not the share of GDP available for nongovernment use.

In a market economy, the interest rate adjusts to ensure equality among

National saving in 2010 was

Suppose the government share of GDP is 25 percent and the consumption, investment, and net export shares of GDP are 60, 12, and 3 percent, respectively. If, all else held constant, businesses become more optimistic about the benefits of investment, then

The Central Idea

Observing and Explaining the Economy

The Supply and Demand Model

Subtleties of the Supply and Demand Model: Price Floors, Price Ceilings, and Elasticity

Macroeconomics: the Big Picture

Measuring the Production, Income, and Spending of Nations

Unemployment and Employment

Productivity and Economic Growth

Money and Inflation

The Nature and Causes of Economic Fluctuations

Deriving the Formula for the Keynesian Multiplier and the Forward-Looking Consumption Model

The Economic Fluctuations Model

Using the Economic Fluctuations Model

Fiscal Policy

Monetary Policy

Capital and Financial Markets

Economic Growth and Globalization

International Trade

International Finance

Reading, Understanding, and Creating Graphs

the Miracle of Compound Growth

Present Discounted Value

Deriving the Growth Accounting Formula

Filters

A decrease in the share of government purchases will the share of GDP available for nongovernment purchases and the interest rate in the long run.