Exam 7: The Spending Allocation Model

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

Suppose businesses seriously believe that, within a year, a new generation of computers will be developed that will be more powerful than the current ones but cheaper to run. Assuming everything else held constant, how will the investment share of GDP be affected?

In a mixed economy, if the government share of GDP is 20 percent, then the sum of the nongovernment shares will, in equilibrium, equal 80 percent because of

The initial effect of an increase in the share of government purchases is

If the government share of GDP increases by a certain percent, the sum of the other shares of GDP will fall by a greater amount.

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

Suppose initially that C = 800, I = 300, G = 200, and X = -100. (A) What is GDP? (B) Calculate the faur shares of GDP (C) Suppose Gincreases to 300 and GDP increases to 1,500. What is the new gavernent spenting share? Draw a diagran to jllustrate what happens to the equilibriun interest rate. (D) Without doing any calculations, exgalain what happens to each of the three nongavernment shares of GDP after the government spenfing and GDP increase in (C) (E) Suppose instead that Gincreases to 300 and GDP increases to 2,000. What is the new covernment spending share? Draw a diagram to ilustrate what happens to the ectuilibrium interest rate. (F) Without daing any calculations, explain what happens to each of the three nongoverment shares of GDP after the goverment spending and GDP increase in (E).

The government purchase share of GDP is not sensitive to changes in the interest rate.

Net exports for the United States have been negative in the past 25 years, with an increasingly larger difference between imports and exports.

Which of the following statements is true?

In a market economy, if the sum of the consumption, investment, and net export shares of GDP is greater than 1 minus the government share of GDP, market forces will result in

The consumption share is negatively related to the real interest rate because a higher interest rate today

The nongovernment share of GDP

Explain why the nongovernment share line of GDP slopes downward.

Which of the following situations best explains a leftward shift in the consumption share line?

An increase in taxes will not affect the relationship between consumption and real interest rates.

Suppose that, as a result of a financial crisis in Asia, there is a large decline in the demand for U.S. exports. (A) What effect will this have an the interest rate and the faur shares af GDP? (B) Suppose that, at the sane time, there is a shap increase in the demand for U.S. dollar-tenaminated assets as a result of the financial crisis in Asia. Will this tend to offert or enhance the changes that you faund in part $( A )$ ?

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

If the nongovernment share of GDP shifts to the right, the government share of GDP will decline.

If the sum of the consumption and investment shares of GDP is 78 percent, the government share of GDP has to be less than or equal to 22 percent.