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Exam 4: Consumption, Saving, and Investment

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Question 31

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In the goods market equilibrium condition for a closed economy,the total demand for goods equals

A)
B)
C)
D)

E) B) and C)
F) None of the above

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Question 32

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Calculate the tax-adjusted user cost of capital of a machine that costs $10,000 and depreciates at a rate of 10%,when the real interest rate is 3% and the tax rate on revenue is 5%.

A) $1238
B) $1300
C) $1368
D) $1800

E) None of the above
F) B) and D)

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Question 33

Multiple Choice

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The substitution effect of a decrease in real interest rates is to cause a consumer to

The nominal interest rate on taxable bonds is 8%,while on municipal bonds (which aren't taxable)it is 5%.The expected inflation rate is 3% and the tax rate on interest income is 40%.Calculate the expected after-tax real interest rate on both bonds.Which would be the better investment? Now suppose the actual inflation rate turned out to be 6%.Which bond was the better investment? Would your answer change if inflation had turned out to be 0%?

The yield curve shows

If Claudette gets a permanent increase in her income of $1000 per year,she saves an extra $200 this year and consumes an extra $800 this year.If the increase in income had been temporary instead of permanent,she would have saved ________ of the extra income.

Suppose you divide your life into two periods-working age and retirement age.When you work,you earn labor income Y; when retired,you earn no labor income,but must live off your savings and the interest it earns.You have no initial assets.You save the amount S while working,earning interest at rate r,so you have (1 + r)S to live on when retired.Because you don't need to consume as much when retired,you want to set consumption when working twice as high as consumption when retired. (a)Suppose you earn $1 million over your working life,and the real interest rate for retirement saving is 50%.How much will you save,and how much will you consume in each part of your life? (b)Suppose your current income went up to $2 million when working.Now what will you save and how much will you consume each period? (c)Suppose a social security system will pay you 25% of your working income when you are retired.Now (with Y = $1 million as in part (a)how much will you save and how much will you consume each period? (d)Suppose the interest rate rises.Will you save more or less?

Identify two variables that shift the desired investment curve.Is desired investment negatively related or positively related to each of these variables?

A firm should invest more if Tobin's q

An increase in expected future output while holding today's output constant would

Which of the following machines has the lowest user cost? Machine A costs $15,000 and depreciates at a rate of 25%,machine B costs $10,000 and depreciates at a rate of 20%,machine C costs $20,000 and depreciates at a rate of 10%,and machine D costs $17,000 and depreciates at a rate of 11%.The expected real interest rate is 0%.

If the government reduces the effective tax rate on capital (in a closed economy) ,then the real interest rate ________ and saving ________.

A technological improvement will

Suppose the government provides a tax cut today that is matched by a tax increase in the future that's equal in present value to the tax cut.This causes a consumer's saving to

Suppose your company is in equilibrium,with its capital stock at its desired level.A permanent decline in the expected real interest rate now has what effect on your desired capital stock?

If the government cuts taxes today,issuing debt today and repaying the debt plus interest next year,a rational taxpayer will

Use a saving-investment diagram to explain what happens to saving,investment,and the real interest rate in each of the following scenarios in a closed economy. (a)Current output rises due to a temporary productivity increase. (b)The tax code changes so that business firms face higher tax rates on their revenue (offset by other lump-sum tax changes so there's no overall change in tax revenue). (c)The government increases spending temporarily for a one-year project to turn mercury into gold. (d)The average educational level rises,inducing an increase in the future marginal productivity of capital.

If the stock market booms and people feel wealthier (in a closed economy) ,then the real interest rate ________ and investment ________.

David consumes 140 in the current period and 220 in the future period.David's present value of lifetime consumption is 340.The real interest rate is

If the substitution effect of the real interest rate on saving is smaller than the income effect of the real interest rate on saving,then a rise in the real interest rate leads to a ________ in consumption and a ________ in saving,for someone who's a lender.