MACROECONOMICS
10th Edition
ISBN: 9781319106072
Author: Mankiw
Publisher: MAC HIGHER
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Question
Chapter 19, Problem 9PA
(a)
To determine
Explain why investment depends on national income.
(b)
To determine
Explain the fiscal-policy multipliers in the Keynesian-cross model.
(c)
To determine
Shift of IS curve.
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Use the classical general equilibrium model WITH INVESTMENT and GRAPHICAL
ANALYSIS to discuss the effects on the LEVELS of consumption, investment, GDP, the
interest and the price level at time t of
(a) A permanent DECREASE in the level of productivity (that is, a decrease in At and
At+1)
(b) A temporary DECREASE in the level of productivity (that is, a decrease in A; but not
in A-1)
(c) An ANTICIPATED DECREASE in the level of productivity (that is, a decrease in Ag+1
but not in A:)
The consumption and saving functions in the Keynesian model
Suppose we observe that a person's disposable income (DI) is 50,000 in 2019 and 63,000 in 2020. Suppose we
observe that this person's consumption (C) is 47,000 in 2019 and 58,700 in 2020. Assume that this person's
consumption obeys the Keynesian consumption function, so that C = A + MPC*DI. Finally, assume that A and MPC are
unchanged between 2019 and 2020.
(a) Calculate the values of A and MPC for this consumer, and graph the consumption function. (Hint: subtract the C
function in 2019 from the C function of 2020).
(b) In general, saving is given by the formula S = DI - C. Calculate this person's saving in 2019 and 2020. Assuming that
this person's wealth (net worth) on January 1, 2019 was 80,000, what is their wealth on January 1, 2020? on January 1,
2021?
(c) In general, if consumption is given by the function C = A + MPC*DI, then saving will obey the saving function S = -A
+ (1 - MPC)*DI. Plot the saving function…
In a two-period model, an individual earns and consumes C1 in period 1 and only consumes C2 in period 2. Suppose the saving interest rate is 3.3% and the income in period 1 is $4,500. Assuming consumption smoothing, the consumption (C1 or C2) for period 1 and period 2 should be $ A . Compute A.In a two-period model, an individual earns and consumes C1 in period 1 and only consumes C2 in period 2. Suppose the saving interest rate is 3.3% and the income in period 1 is $4,500. Assuming consumption smoothing, the consumption (C1 or C2) for period 1 and period 2 should be $ A . Compute A.
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