Exam 19: The Spending Allocation Model

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.

All three nongovernment shares of GDP are negatively related to the interest rate.

An increase 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.

An increase in the real interest rate leads to

In 2010,the government share of GDP was about

A decrease in real interest rates will cause

If the real interest rate increases and businesses expect that new equipment will significantly reduce their production costs in the future,then the investment share could increase,decrease,or stay the same.

It is the government's responsibility to ensure that the sum of all four shares of GDP equals 1.

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

The share of GDP available for nongovernment use

Suppose the government share of GDP is 25 percent and the consumption,investment,and net export shares of GDP are 60,15,and 3 percent,respectively.Under these circumstances,we would expect

To determine the long-run interest rate,you can use either the four-diagram approach or the saving-investment approach.

A decrease in the GDP share of government purchases causes a crowding out of investment in the short run.

The investment share of GDP is expressed as

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

The real interest rate is the only factor that affects the consumption share of GDP.

The real interest rate can never be negative.

When the government share of GDP increases,

Suppose that,at the current interest rate,the sum of the consumption,investment,and net export shares is greater than the share available for nongovernment use. Explain how the current interest rate will have to change to reach the long-run equilibrium.Illustrate the effect on each of the nongovernment shares of GDP.