In the Neoclassical model of determination of income in the long run we assumed that aggregate consumption was an increasing function of disposable income, , and nothing else. Suppose that instead we assume that consumption is an increasing function of disposable income, , and a decreasing function of the real interest rate, . Provide an economic rationale for making consumption a function of the real interest rate. How does this assumption change the national saving function relative to the benchmark model?
In the Neoclassical model of determination of income in the long run we assumed that aggregate consumption was an increasing function of disposable income, , and nothing else.
Suppose that instead we assume that consumption is an increasing function of disposable income, , and a decreasing function of the real interest rate, . Provide an economic rationale for making consumption a function of the real interest rate. How does this assumption change the national saving function relative to the benchmark model?
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Consider now a situation in which the government increases its expenditure in infrastructure such as highways, railways or expanding broadband networks. Furthermore, assume that this expenditure increases the marginal product of capital. Use a diagram for the market for loanable funds to describe what happens to national saving, national investment, and the real interest rate when government expenditure in infrastructure increases. How does your answer change relative to question (2)?
by Bartleby ExpertIn the Neoclassical model of determination of income in the long run we assumed that aggregate consumption was an increasing function of disposable income, , and nothing else.
Suppose that instead we assume that consumption is an increasing function of disposable income, , and a decreasing function of the real interest rate, . Provide an economic rationale for making consumption a function of the real interest rate. How does this assumption change the national saving function relative to the benchmark model
Using the model developed in (1), use a diagram for the market for loanable funds to describe what happens to national saving, national investment, and the real interest rate when government expenditure increases. Make sure to also explain in your own words the economic intuition of your results.
by Bartleby Expert
