INTEREST RATE Step 1: The Effect of Saving on the Interest Rate The following graph shows the saving curve (S) and the investment curve (I) for a small economy. Adjust the following graph to show the effect of an increase in saving at any interest rate in this economy, which behaves according to the classical view. The Classical View of the Credit Market DOLLARS SAVED OR INVESTED S ロー S Which of the following is an argument by the classical economists? The higher the interest rate is, the higher the reward is for saving. The lower the interest rate is, the fewer funds firms borrow and invest. The lower the interest rate is, the higher the reward is for saving. The higher the interest rate is, the more funds firms borrow and invest. ? The S (orange line) can only be moved up 1 time or down 1 time and if you moved S, the black dashed lines will move to. The L (the blue line) can move up 1 time or down 1 time and also if you move the L (blue line) then the black dashed line will move too like S (orange line) Step 2: The Effect of Saving on Total Expenditures The following table shows data for the economy before the increase in saving. Suppose that the increase in saving causes consumption to fall from $400 million to $350 million. Assume Say's law holds in this economy. Fill in the data for the economy after the increase in saving. Before Saving Increase After Saving Increase Consumption (C) $400 million $350 million Investment (1) $50 million $ million Government Purchases (G) $200 million $ million Exports (EX) $800 million $800 million Imports (IM) $700 million $700 million As a result of the increase in saving, total expenditures will fall, remains unchanged, rise.
INTEREST RATE Step 1: The Effect of Saving on the Interest Rate The following graph shows the saving curve (S) and the investment curve (I) for a small economy. Adjust the following graph to show the effect of an increase in saving at any interest rate in this economy, which behaves according to the classical view. The Classical View of the Credit Market DOLLARS SAVED OR INVESTED S ロー S Which of the following is an argument by the classical economists? The higher the interest rate is, the higher the reward is for saving. The lower the interest rate is, the fewer funds firms borrow and invest. The lower the interest rate is, the higher the reward is for saving. The higher the interest rate is, the more funds firms borrow and invest. ? The S (orange line) can only be moved up 1 time or down 1 time and if you moved S, the black dashed lines will move to. The L (the blue line) can move up 1 time or down 1 time and also if you move the L (blue line) then the black dashed line will move too like S (orange line) Step 2: The Effect of Saving on Total Expenditures The following table shows data for the economy before the increase in saving. Suppose that the increase in saving causes consumption to fall from $400 million to $350 million. Assume Say's law holds in this economy. Fill in the data for the economy after the increase in saving. Before Saving Increase After Saving Increase Consumption (C) $400 million $350 million Investment (1) $50 million $ million Government Purchases (G) $200 million $ million Exports (EX) $800 million $800 million Imports (IM) $700 million $700 million As a result of the increase in saving, total expenditures will fall, remains unchanged, rise.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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TOPIC: Classical economists and interest rate flexibility
Transcribed Image Text:INTEREST RATE
Step 1: The Effect of Saving on the Interest Rate
The following graph shows the saving curve (S) and the investment curve (I) for a small economy.
Adjust the following graph to show the effect of an increase in saving at any interest rate in this economy, which behaves according to the
classical view.
The Classical View of the Credit Market
DOLLARS SAVED OR INVESTED
S
ロー
S
Which of the following is an argument by the classical economists?
The higher the interest rate is, the higher the reward is for saving.
The lower the interest rate is, the fewer funds firms borrow and invest.
The lower the interest rate is, the higher the reward is for saving.
The higher the interest rate is, the more funds firms borrow and invest.
?
The S (orange line) can only be
moved up 1 time or down 1 time
and if you moved S, the black
dashed lines will move to. The L
(the blue line) can move up 1
time or down 1 time and also if
you move the L (blue line) then
the black dashed line will move
too like S (orange line)
Step 2: The Effect of Saving on Total Expenditures
The following table shows data for the economy before the increase in saving. Suppose that the increase in saving causes consumption to fall
from $400 million to $350 million. Assume Say's law holds in this economy.
Fill in the data for the economy after the increase in saving.
Before Saving Increase After Saving Increase
Consumption (C)
$400 million
$350 million
Investment (1)
$50 million
$
million
Government Purchases (G)
$200 million
$
million
Exports (EX)
$800 million
$800 million
Imports (IM)
$700 million
$700 million
As a result of the increase in saving, total expenditures will
fall, remains
unchanged, rise.
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