Question 1

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

Accepted Answer

A)  An increase in the consumption share of GDP 
B)  A decline in the investment share of GDP 
C)  A decline in the net export share of GDP 
D)  A decline in the government share of GDP 
E)  An increase in the net export share of GDP 
A)  An increase in the consumption share of GDP 
B)  A decline in the investment share of GDP 
C)  A decline in the net export share of GDP 
D)  A decline in the government share of GDP 
E)  An increase in the net export share of GDP

Question 2

An increase in the real interest rate leads to

Accepted Answer

A)  an upward movement along the consumption share line. 
B)  a rightward shift in the consumption share line. 
C)  a downward movement along the consumption share line. 
D)  a leftward shift in the consumption share line. 
E)  an ambiguous effect on the consumption share line. 
A)  an upward movement along the consumption share line. 
B)  a rightward shift in the consumption share line. 
C)  a downward movement along the consumption share line. 
D)  a leftward shift in the consumption share line. 
E)  an ambiguous effect on the consumption share line.

Question 3

All else held constant, interest rates will increase if there is an increase in the nongovernment share of GDP.

Accepted Answer

A) True 
 B)False

Question 4

Suppose the government decides to reduce the tax rate for firms that increase their investment. Use the four-diagram approach to show what happens to the interest rate and the shares of GDP in the long run.

Accepted Answer

This will increase the incentive for fir

Question 5

Which of the following situations would best explain why the real long-term interest rate would increase?

Accepted Answer

A)  An increase in the consumption share of GDP 
B)  A decrease in the investment share of GDP 
C)  A decrease in the government share of GDP 
D)  A decrease in exports 
E)  An increase in imports 
A)  An increase in the consumption share of GDP 
B)  A decrease in the investment share of GDP 
C)  A decrease in the government share of GDP 
D)  A decrease in exports 
E)  An increase in imports

Question 6

The national saving rate, S/Y, is equal to 1 minus the government share.

Accepted Answer

A) True 
 B)False

Question 7

The nongovernment share of GDP

Accepted Answer

A)  is, for any real interest rate, the sum of the share of net exports, investment, and consumption expenditures. 
B)  is, for any interest rate, equal to 1 minus the government spending share of GDP. 
C)  is positively related to the real interest rate. 
D)  is, for any interest rate, the sum of investment and consumption shares. 
E)  is negatively related to the real interest rate. 
A)  is, for any real interest rate, the sum of the share of net exports, investment, and consumption expenditures. 
B)  is, for any interest rate, equal to 1 minus the government spending share of GDP. 
C)  is positively related to the real interest rate. 
D)  is, for any interest rate, the sum of investment and consumption shares. 
E)  is negatively related to the real interest rate.

Question 8

Saving by households can be thought of as

Accepted Answer

A)  investment plus consumption. 
B)  future consumption. 
C)  income plus consumption. 
D)  investment plus future consumption. 
E)  GDP less investment. 
A)  investment plus consumption. 
B)  future consumption. 
C)  income plus consumption. 
D)  investment plus future consumption. 
E)  GDP less investment.

Question 9

Which of the following situations would best explain why the real long-term interest rate would decline?

Accepted Answer

A)  A decrease in wealth 
B)  An increase in the consumer confidence index 
C)  An increase in public infrastructure investment 
D)  A decrease in U.S. demand for foreign products 
E)  Optimism about the benefits of investment opportunities 
A)  A decrease in wealth 
B)  An increase in the consumer confidence index 
C)  An increase in public infrastructure investment 
D)  A decrease in U.S. demand for foreign products 
E)  Optimism about the benefits of investment opportunities

Question 10

Explain how interest rates affect investment expenditures.

Accepted Answer

Changes in the interest rate affect the

Question 11

Which of the following best describes the relationship between real interest rates and net exports?

Accepted Answer

A)  The relationship is positive. 
B)  There is no relationship because both imports and exports are unaffected by real interest rates. 
C)  The relationship is negative. 
D)  It is not possible to determine the relationship between the two because exports are negatively related to interest rates and imports are positively related to real interest rates. 
E)  It is not possible to determine the relationship between the two because exports are positively related to real interest rates and imports are negatively related to real interest rates. 
A)  The relationship is positive. 
B)  There is no relationship because both imports and exports are unaffected by real interest rates. 
C)  The relationship is negative. 
D)  It is not possible to determine the relationship between the two because exports are negatively related to interest rates and imports are positively related to real interest rates. 
E)  It is not possible to determine the relationship between the two because exports are positively related to real interest rates and imports are negatively related to real interest rates.

Question 12

Suppose there is an increase in the government share of GDP.
(A)Draw a diagram showing the effect this has on the nongovernment share of GDP. What happens to interest rates?
(B)Suppose you observe that, concurrent with the increase in the government share of GDP, a decline in the net export share occurs. Is this a coincidence? Explain.
(C)If the decline in the net export share of GDP is substantial, what might this imply about the interest rate sensitivity of net exports?

Accepted Answer

(A)The effect of the increase in the gov

Question 13

The investment share line will become flatter if investment becomes more sensitive to changes in the real interest rate.

Accepted Answer

A) True 
 B)False

Question 14

The real interest rate affects the incentive to save.

Accepted Answer

A) True 
 B)False

Question 15

An increase in optimism about the strength of the economy will

Accepted Answer

A)  cause the investment share line to shift to the left. 
B)  cause a leftward movement along the investment share line. 
C)  have no effect on the investment share line. 
D)  cause the investment share line to shift to the right. 
E)  cause a rightward movement along the investment share line. 
A)  cause the investment share line to shift to the left. 
B)  cause a leftward movement along the investment share line. 
C)  have no effect on the investment share line. 
D)  cause the investment share line to shift to the right. 
E)  cause a rightward movement along the investment share line.

Question 16

Which of the following statements is true?

Accepted Answer

A)  Recently, the government purchases share of GDP has been close to 50 percent. 
B)  The net export share of GDP can be positive or negative. 
C)  Since World War II, the consumption and investment shares of GDP have moved erratically. 
D)  Recently, the investment share of GDP has been close to 50 percent. 
E)  All four spending shares must be positive and must add up to one. 
A)  Recently, the government purchases share of GDP has been close to 50 percent. 
B)  The net export share of GDP can be positive or negative. 
C)  Since World War II, the consumption and investment shares of GDP have moved erratically. 
D)  Recently, the investment share of GDP has been close to 50 percent. 
E)  All four spending shares must be positive and must add up to one.

Question 17

A decrease in the United States interest rate relative to the Japanese interest rate will cause the exchange rate, measured in yen per dollar, to ____ as international investors ____ their demand for dollar-denominated assets.

Accepted Answer

A)  rise; increase 
B)  fall; increase 
C)  rise; decrease 
D)  None of these are correct because only the government can change the exchange rate. 
E)  fall; decrease 
A)  rise; increase 
B)  fall; increase 
C)  rise; decrease 
D)  None of these are correct because only the government can change the exchange rate. 
E)  fall; decrease

Question 18

Which of the following events is most likely to cause the investment share line to shift to the right?

Accepted Answer

A)  The release of a government report demonstrating that new computer equipment will lower future business costs 
B)  A decrease in the investment tax credit 
C)  A rise in real interest rates 
D)  An increase in pessimism 
E)  A decline in interest rates 
A)  The release of a government report demonstrating that new computer equipment will lower future business costs 
B)  A decrease in the investment tax credit 
C)  A rise in real interest rates 
D)  An increase in pessimism 
E)  A decline in interest rates

Question 19

Suppose, for reasons associated with political stability, international investors decide to increase their demand for dollars. Show what will happen to the net export share of GDP.

Accepted Answer

A stronger dollar will result in net exp

Question 20

Explain how the interest rate behaves like a price in the sense that it serves as both a signal and an incentive.

Accepted Answer

If the share of nongovernment expenditur

Exam 7: The Spending Allocation Model

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

An increase in the real interest rate leads to

All else held constant, interest rates will increase if there is an increase in the nongovernment share of GDP.

Suppose the government decides to reduce the tax rate for firms that increase their investment. Use the four-diagram approach to show what happens to the interest rate and the shares of GDP in the long run.

Which of the following situations would best explain why the real long-term interest rate would increase?

The national saving rate, S/Y, is equal to 1 minus the government share.

The nongovernment share of GDP

Saving by households can be thought of as

Which of the following situations would best explain why the real long-term interest rate would decline?

Explain how interest rates affect investment expenditures.

Which of the following best describes the relationship between real interest rates and net exports?

The investment share line will become flatter if investment becomes more sensitive to changes in the real interest rate.

The real interest rate affects the incentive to save.

An increase in optimism about the strength of the economy will

Which of the following statements is true?

A decrease in the United States interest rate relative to the Japanese interest rate will cause the exchange rate, measured in yen per dollar, to ____ as international investors ____ their demand for dollar-denominated assets.

Which of the following events is most likely to cause the investment share line to shift to the right?

Suppose, for reasons associated with political stability, international investors decide to increase their demand for dollars. Show what will happen to the net export share of GDP.

Explain how the interest rate behaves like a price in the sense that it serves as both a signal and an incentive.

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 United States interest rate relative to the Japanese interest rate will cause the exchange rate, measured in yen per dollar, to as international investors their demand for dollar-denominated assets.