Exam 7: The Spending Allocation Model

An increase in G reduces the national saving rate.

Suppose the government share of GDP is 20 percent and the consumption, investment, and net export shares of GDP are 60, 15, and 5 percent, respectively. If, all else held constant, businesses become more optimistic about the benefits of investment, then

The consumption share will increase if there is a decrease in the real interest rate.

Explain how it is possible for the sum of government, consumption, and investment expenditure shares of GDP to exceed one.

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

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

If the dollar appreciates against the Chinese yuan , then Chinese exports to the United States will increase and American exports to China will decrease.

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.

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

If net exports become less sensitive to changes in the exchange rate, the net export share of GDP will get steeper.

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 the real interest rate increases and the investment tax credit is abolished, the investment share will increase.

The net export share has been negative for the last 30 years.

The spending allocation model applies more to the long run than to the short run.

Answer the questions below: (A) Same arpue that Japan's sayng rate is tod high. Suppose all Japanese citizens decice to 5ave at a lower rate. Show what happens in this case in the saving and investument diagram where the $\boldsymbol { S } /\boldsymbol { Y }$ curve shifts. (B) Naw show the same situation in the CY, $I/ Y$ , and $X /Y$ diagrams. Which curve shifts? If the guvernment share of GDP does not change, then what must happen to interest rates? Explain how this affects the faur shares. (C) Suppose that when the Jepanese citizens began 5aring at a lower rate, the gavernment reduced its level of spending and the guvermment share of GDP fell. Illustrate the effect an the interest rate using the saving-investment appraach and the four-tliagram appranch in parts (A) and (B) What happens to the faur shares of GDP?

The share of GDP purchases is determined by

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

Which share is not sensitive to changes in the real interest rate?

The generation of people who lived through the Great Depression is much more fiscally conservative than the baby boom generation. The baby boomers have tended to spend more freely, amass more debt, and save significantly less than those who lived through the Great Depression. (A) As those wha Gred thraugh the Great Depressian pass awray, they are lecking thei accumulated wealth to their baty boum children. What effect will this heve an the cansumption share line? Please explan. (B) As the baby boamers cantinue to spend freely, how might their spencling affect consumption exgenditures in the future?

The intersection between the sum of the nongovernment shares of GDP and the share of GDP available for nongovernment use determines